Economy : Learning Basic Concepts

2010-11-07T00:46:00.000-07:00

IS ECONOMICS A SCIENCE OR AN ART?

Economics is science in its methodology and an art in its application, because it has theoretical as well as practical aspects.

What is Science?
Science is a systematized body of knowledge ascertainable by observation and experiment. It is a body of generalizations, principles, theories or laws which traces out a casual relationship between causes and results.

Kinds of Science:

There are two kinds of science:
Positive Science
Normative Science or Prescriptive Science

Positive science only explains "what is" and normative science tells us "what ought to be"-i.e., positive science describes while normative science evaluates. Thus, in positive science we derive propositions, theories and laws following certain rules of logic, which explain the cause and effect relationship between economic variables. While normative science is concerned with describing what should be the things.

Positive microeconomics is concerned with explaining the determination of relative prices and allocation of resources between different commodities. Whereas, positive macroeconomics is concerned with how the level of national income and employment, aggregate consumption and investment, and general price levels are determined. Normative economics is concerned with what price for a product should be fixed, what wage rate should be paid, how income should be distributed, etc.

What is Art?
Art is the practical application of scientific laws, principles and theories.

ECONOMICS AS A POSITIVE SCIENCE, NORMATIVE SCIENCE OR AN ART:

Economics is a positive science because:

Firstly, economists collect the facts.
Secondly, they analyze them and derive result.
Thirdly, they determine the relationship between facts and results.
Finally, they give a title to the bosomed relationship.

Economics is normative science because:

Firstly, economists points out different economic problems.
Secondly, they analyse them in the light of statistics or facts and figures.
Finally, they advise policies, laws, theories to solve the problems.

Economics is an art because:

Economists suggest policies along with their implementation procedures to solve the economic problem.

Thus, economics is a science as well as an art.

Example: When an economy faces the problem of over population, the economists explain its causes like illiteracy, sociological and cultural set-up, early marriages, desire of having a good number of children, lack of access to birth control centers, reduced deaths rate, religious considerations, etc. This analysis is said to be positive economics or science.

When economists suggest to control birthrate by late marriages, education, changing social and cultural set-up, higher standard of living by less number of children, providing door to door birth control facilities, etc. this is said to be normative economics or science.

When government implement all this suggestions and people act upon and take care by different means and actions it becomes art.

Thus, economics is a science as well as an art.

2010-11-07T00:26:00.000-07:00

WHAT IS THE ECONOMIC PROBLEM AND WHY DOES IT ARISE?

According to the economists, a problem of choice is an economic problem. It can easily be explained in the light of Prof. Lionel Robbins' definition of economics. The economic problems arise when:

Human desires are unlimited.
Human desires are different in importance.
Human beings have limited resources to satisfy their desires.
Resources satisfying unlimited desires have alternative uses.

The presence of the above mentioned aspects of desires and means compel people to make choice between more urgent and less urgent. People participate in different economic activities to create means and satisfy maximum of their wants and this is a continuous process.

WHEN DOES THE ECONOMIC PROBLEM NOT ARISE?

Economic Problem does not arise when:

Human desires become limited.
Human desires do not differ in importance.
Human beings have unlimited resources to satisfy their desires.
Resources satisfying unlimited human desires have no alternative uses.

In the above situation, when a person or a nation has multiple means to satisfy wants, will neither face any economic problem, nor take part in the economic activities.

WHETHER ECONOMICS CAN SOLVE PRACTICAL PROBLEMS?

Our satisfies maximum of his desires on priority basis. He achieves his satisfaction up to a maximum level with the help of available and alternatively used resources. Similarly, a community also utilizes her natural and artificial resources, time and manpower to maximize her social benefits in the light of various policies formed by the experts and on return results into achieving higher standard of living. Through the application of all economic policies, laws, principles and methods an economy can become able to get full employment level without inflation or deflation. Thus, economics can solve the practical problems.

According to Prof. Dr. J. M. Keynes

"Economics is a method rather than a doctrine, an apparatus of mind, a technique of thinking which helps its experts to draw correct conclusions."

According to Prof. A. C. 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."

2010-11-06T06:57:00.000-07:00

NATURE AND SCOPE OF ECONOMICS

The nature and scope of economics can be understood by the study of the following points:

What is the subject matter of economics?
What is economic problem and why does it arise?
Whether economics can solve practical problems?
Is economics a science or an art?
If economics is a science, what kind of science is it?
Whether economics is a social science?

SUBJECT MATTER OF ECONOMICS:
Classists considered economics as a science of wealth, while Neo-Classists called it "the science of material welfare of the people and gave secondary status to the wealth or considered it as a means of getting material welfare". Professor Lionel Robbins defined it as a science of scarcity and choice-i.e., how maximum of the desires can be satisfied with the limited resources J.M. Keynes called it "the science of the determination of income and employment level". All this discussion comes to the point that basically economics is the science of wealth because wealth is the only means by which material welfare of people can be maximized, maximum possible desires can be satisfied and desired level of income and employment can be achieved. Because Robbins' view is commonly accepted, therefore, the subject matter of economics is also his view. Thus, in economics the behavior of the human being is studied which he adopted as a relationship between scarcity of means and multiplicity of ends. Means like time, money, wealth and natural resources are limited while human desires are unlimited. Therefore, a question arises that how the resources are allocated to satisfy maximum of wants?

Simply, economics is related with the decision what should be produced, how should be produced, for whom should be produced and when should be produced. Further, how the scarce resources should be used to increase the level of economic development target. Thus, in the subject matter of an economy following points are discussed:

1. Optimum Utilization of Resources:
The economy should use natural, human and artificial resources in such a way that there should not be any misuse or waste of these resources. That is, the economy must endeavor to achieve full employment not only of labour but of all its resources.

2. What Commodities to be Produced?
Any economy decides to the quantity and the type of goods to be produced. Since means are scarce, the economy chooses between different alternative collections of goods and services that may be produced. Basic needs are produced on preference basis for this purpose price theory is taken into study.

3. In what Quantity to be Produced?
After deciding the production of goods, quantity to be produced is decided. For this purpose degree of demand is kept in view to avoid from over production.

4. How to Produce?
After deciding the goods to be produced and their quantity, the economists or experts determine the techniques of production to be used, e.g., labour-intensive or capital-intensive. For this purpose we study production of wealth.

5. Where and When to be Produced?
The next decision about goods to be produced is to decide proper place and time for production. For this purpose the experts take in to account means of transport and communications, availability of raw material and laborers, and market conditions, etc. Similarly, they also keep in view the weather, customs, traditions and fashion, etc.

6. How to Distribute the Produce?
As the production of goods is the result of joint efforts of factors of production like land, labour, capital and organization, therefore, it must be distributed among them according to their contribution. For this purpose theories of distribution of wealth help the experts.

After keeping all above problems in view it becomes necessary to keep expanding or developing the production., consumption, exchange and distribution. Standard of living of the people, economic growth and development must be kept to continue to the higher possible level.

2010-11-05T06:51:00.000-07:00

MODERN SCHOOL OF THOUGHT

"Economics is the Science of Scarcity and Choice"

Prof. Lionel Robbins has strongly criticized Alfred Marshall's definition about economics in 1931-1932 in his book "Nature and Significance of Economic Science." He said that the concept of material welfare does not explain the subject economics on wide and scientific grounds. The word "material" imposed unnecessary limitation.

Prof. Lionel Robbins thus defined economics in the following four fundamental propositions that constitute the basis of the structure of economic science.

1. Human wants or ends are unlimited.

2. Human wants are different in importance.

3. Resources to fulfil human wants are limited.

4. Resources have alternative uses.

1. Wants or Ends are Unlimited:

Human beings have wants which are unlimited in number. If one want is satisfied another crops up. If wants had been limited, they would have not and all incentives to economic effort would have ceased.

2. Wants or Ends vary in Importance:

Human wants are not of equal importance because these are uncountable. Therefore, they compel us to choose between more urgent and less urgent ones.

3. Resources are Scarce:

To satisfy unlimited wants people have limited economic resource. These resources are various types of labour Capital, land and entrepreneurship used in producing goods services. Since these resources are limited, the ability of the community to produce goods and services is also limited.

4. Resources have Alternative Uses:

The limited resources are capable of alternative uses. As wants are varying in importance, some are more urgent and others less urgent. There, resources should be used selectively to the most urgent wants firstly, so choice comes again.

Keeping all the above points in view, Robbins' idea can simply be stated in the following words of Prof. Wicksteed.

"Economics is a science which is the study of those principles on which the resources of a community should be so regulated and administrated as to secure the communal ends without waste."

According to Prof. Lionel Robbins

"Our economics holds good under barter as well as under money exchange, under individual as well as under social human conduct, under capitalist as well as under socialist society."

The followers of Lionel Robins' like Wicksteed, Schonfeld, Hans Mayhers, Carl Manger, Strigler, Fetter, Schaffle, Spaan, Cohen, Oppenheimer, Maxweber, Voigt etc. also called economics as "a science of scarcity and choice."

All of them are of the view that resources as compared to desires are limited and economic problem is that how these limited resources can be used to satisfy maximum desires.

According to Prof. Stigler

"Economics is the study of the principles governing the allocation of scarce means among competing ends when the objective of allocation is to maximize the attainment of the ends."

SUPERIORITY OF ROBBINS' DEFINITION:

Robbins has provided a strong basis of the relationship between unlimited desires and limited means to the structure of economics science, which has changed the scope of economics. His definition about economics is superior to all the earlier definitions, which can easily be understand from the following points:

1. Scientific View:

Prof Lionel Robbins' definition about economics is more scientific because it is not based on the Marshall's artificial classification of material and non-material desires, rather it is based on realistic view of multiple ends and scarce means.

2. Neutral:

Prof. Lionel Robbins, "economics is a neutral science". It is not concerned with normative aspects. Thus, economics is free from the responsibility of making value judgements. It is no longer its function to examine the right or wrong of an economic activity.

3. Universal in Nature:

Prof. Lionel Robbins' definition about economics is universal in nature. It takes into account all types of human wants, material or non-material, as well as of all types of persons whether living in society or not.

4. Comprehensive and Clear:

Prof. Robbins' definition about economics is comprehensive and clear because it is based on realities of life. no one can deny the fact of unlimited wants and limited resources of the people. Therefore, his statement proves comprehensive and clear everywhere and every time.

5. Free of Animadversions:

In the light of Robbins' definition about economics, "economics cannot be called a dismal science, pig philosophy, science of break and butter, science of selfishness and greediness or degrading sordid inquiry because it takes no responsibility of selecting the ends". They may be good or bad. Economics is directly concerned with the multiple ends and scarce means, cannot be animadversioned.

6. Analytical Study:

Prof. Robbins' definition about economics is an analytical study which has widened the scope of economic science. Because it does not deal with particular place or time, rather it applies on all places, all times and all the people.

DRAWBACKS:

Robbins claims that his definition is superior to the earlier definitions but so many economists have criticized his view about economics from different angles and have put a strong defence of Marshallian economics. According to them, it is very difficult for economists to divest their discussions completely of all normative significance. R. W Souter, T. Parsons, Lindley Fraser, A. L. Macfie and Barbara Wooton etc. have pointed out the following drawbacks of Robbins' definition about economics.

1. Economics is not Only a Science but also an Art:

Prof. Robbins has completely ignored the reality that basic objective of all the social science is to increase the human welfare. Thus Economics as a queen of social sciences should be with basic objective of human welfare because economics is not only a science but by acting upon its principles, human life can be developed.

2. Economics can not be Neutral:

Economics is not a neutral science but in practical life people expect advices for the solutions of economic problems from economic experts.

3. It ignores Economic Planning and Economic Development:

Prof. Robbins' definition economics does not explain the concept of economic planning and economic development. While in modern economics both of these concepts are very important branches of economics. Through which a nation can increase its income and prosperity, while Robbins just explain the concept of means and the consumption only which is not sufficient.

4. It Ignores Human Touch:

In the Robbins' definition about economics the importance of human being is completely ignored, while economics is something more than a science. In its study there is a n important aspect of human values also.

5. Scope of Economics Made too Wide:

According to Prof. Lionel Robbins, "Economics takes into account all types of human wants in response to the scarce resources". Since search for wants has been abandoned, the scope of economics has been widened to include phenomena, which are not strictly economic.

6. It Ignores Macroeconomics:

Prof. Robbins emphasized only on how resources are allocated and how prices are determined while economics is much than this. In economics we study how national income is generated, how employment level is determined, how economic fluctuations occur, what is inflation, what is over population, and how can these be controlled, etc.

7. It Lacks Social Implications:

Robbins' definition about economics emphasizes on choice of individual only which has no particular significance because individual choice having no social implications cannot form the subject matter of economics.

8. Economics is Not a Positive Science:

Prof. Robbins made economics a positive science while economics depicts human behaviours, which are not constant. Therefore, its laws state that given certain conditions certain results will follow. Thus economics is not like physical sciences.

CONCLUSION:

Although there are a few drawbacks in the definition of economics given by Prof. Lionel Robbins, even then so many modern economists explain the scope and nature of economics in the light of Robbins' idea of multiple ends and scarce means.

2010-11-04T07:51:00.000-07:00

NEO-CLASSICAL SCHOOL OF THOUGHT
"Economics is the Science of Material welfare"

The founder of the Neo-Classical School of Thought, Prof. Dr. Alfred Marshall has described economics "as a science of material welfare" in his book "Principles of Economics" in 1890.

According to Prof. Dr. Alfred Marshall

"Economics is the study of mankind in the ordinary business of life. It inquires how he gets his income and how he uses it. It 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. It is on the one side, a study of wealth and on the other and more important side is a part of the study of man."

MAIN POINTS
Following are the main points of Marshall's definition:

Science of Material Welfare:

Economics does not regard wealth as the be-all and end-all of economic activities. Wealth is a means of promoting human welfare. Hence, wealth has secondary position.

Economics is a Social Science:

Economics is a social science. It does not study the behaviour of isolated individuals. It studies only the actions of those people who are living in a society and whose behaviour influencing other people and being influenced by them.

Study of Material Welfare:

Economics is the study of material requisites of well-being only. It ignores the immaterial requisites of life. That is, it does not consider the services of teachers, doctors, bankers etc.

Study of Ordinary Business of Life:

Economics is the study of day-to-day life matters of the people. Its subject matter is an ordinary person's earning and spending.

MERITS:
Following are the merits of Marshall's definition about economics:

Social Science:

In economics, actions of those people are being taken into the study who live in the society and cooperate with one another in various activities, thus it is a social science.

   2. Science of Material Welfare:
   Economics is the science of society's material welfare. Which explains the wealth is the only resource that fulfils bitterly our material requisites.

   3. Science of Ordinary Business of Life:
   In economics, those actions of people are being studied which are related to ordinary or day-to-day life matters. It means that economics is not the study of those who are living far away in jungles or deserts.

   4. Analysis of Individual and Social Actions:
   Economics does not study production, consumption and distribution only at individual level; rather it also studies average behaviour of the people living in the society.

   5. Marshall and Modern View:
   Marshall's and his followers' view about material welfare of the society is quite matching with the today's economists' view about the economic development. Both emphasize on raising prosperity level in the society.

   6. Simple and Solid Arguments:
   The concept of human welfare described in Marshall's definition about economics is very simple, straight and solid argument which made the definition more comprehensive. Moreover, this definition is similar to the modern theories and preferences of the society.

   7. Wealth - A Source of Material Welfare:
   Marshall does not consider wealth itself as a source of material welfare but as a means to acquire material requisites of life.

   8. Importance of Human Being:
   According to Dr. Alfred Marshall, "man occupies a primary place and wealth only secondary one. That is, man is important while wealth is just a resource to get necessities comforts and luxuries of life. Therefore, wealth is not as important as man."

DRAWBACKS:
Prof. Lionel Robbins and other economists have criticized Alfred Marshall's definition about economics under the following points:

   1. Narrow Down the Scope of Economics:
   Robbins criticized Marshall's view that economics is the science of material welfare only. While in the actual study of economic principles, both material welfare only. While in the actual study of economic principles, both material and immaterial are taken into account. Services of lawyers, teacher, doctors, bankers, etc. are immaterial economic activities that result into the welfare of the other people. Hence, Marshall has narrowed down the scope of economics.

   2. Welfare - a Vague Concept:
   According to Prof. Lionel Robbins, Marshall's concept of welfare is not clear. It is entirely an internal phenomenon. That is, welfare varies from person to person, time to time and place to place.

   3. Welfare is Immeasurable:
   Prof. Lionel Robbins criticized Marshall's concept of welfare that it is not measurable in numbers like 1, 2, 3, ..., n. because it is entirely a subjective phenomenon.

   4. Theoretical Nature of Definition:
   Alfred Marshall's definition about economics is theoretical in nature. In practical life it is not possible to divide human activities into material and immaterial parts because are interdependent and also cause creation of one another.

   5. Problem of Liking and Disliking:
   If material welfare is considered as basic aspect then problem of liking and disliking appears. An economist cannot remain neutral between good or bad. It is not supposed to be his function to pass moral judgements and say what is good and what is bad.

   6. Economics - Only a Social Science?
   Dr. Alfred Marshall says that economics is a social science. It deals only with the behaviour of those people who are living a society. It ignores all others who are living far away in jungle, deserts or caves while they also may have economic problems i.e., of using scarce means for the satisfaction of unlimited ends.

   7. Ignoring the Traditions:
   Alfred Marshall explains material welfare and material requisites of life while he ignores moral values, customs and traditions etc.,, which have great influence on human';s and social life.

2010-11-04T06:43:00.000-07:00

CRITICISM BY RUSKIN, THOMAS, CARLYLE AND OTHER PEOPLE
Ruskin, Thomas, Carlyle and other social reformers belongs to the last decades of eighteenth century; they criticized the classicist' view on following grounds:

Economics teaches materialism. That is, "it is the science of bread and butter."
Economics degrades man. That is, "it ignores spiritual and moral values like brotherhood, love, friendship, etc".
Economics encourages selfishness and greediness.

In the light of above points, economics cam to be called a:

Science of Materialism
Pig Philosophy
Dismal Science

Similarly, in 1935, Bailey regarded economics as "degrading sordid inquiry".

CRITICISM IS UNJUSTIFIED
Criticism made by the Carlyle, Ruskin and Bailey is quite unjustified, because, they do not come to understand the concept of wealth. They were just taking money and gold as a wealth, while in the sense of economics all the goods and services are considered as a wealth. In this way, the concept of wealth in economics is very wide. In economics, wealth is:

A resource to remove poverty.
A resource to increase the standard of living.
A mean to acquire goods and services.
A resource to increase the human welfare
A resource to increase economic activities.
Not a bad means. Its use could be good or bad.
etc.

CLASSICAL SCHOOL OF THOUGHTS

2010-11-01T10:14:00.000-07:00

However, the definitions about economics can be classified into the following Schools of Thoughts.

Classical School of Thought or Adam Smith and his follower's view.
New-Classical School of Thought or Alfred Marshall and his follower's view.
Modern School of Thought or Robbin's view.

CLASSICAL SCHOOL OF THOUGHT

"Economics is the Science of wealth"

The founder of the Classical School of Thought, Prof. Adam Smith has described economics as "a science of wealth" in his book "And Inquiry into the nature and Causes of Wealth of Nations" in 1776.

According to Adam Smith

"Economics is a subject which studies the nature of wealth and laws which governs its production, consumption, distribution and exchange."

Hence, Adam Smith has described following four aspects of wealth in his definition.

1. Production of Wealth:

How wealth is produced?
What are the factors of production-i.e., land, labour, capital, and organization.
What are the difficulties in production of wealth?
etc

2. Consumption of Wealth:

How individuals spend their money income on consumer goods, capital goods, and services.
How consumers maximize their satisfaction level by using goods and services.
etc

3. Distribution of Wealth:

How produced wealth is distributed among the factors of production in the form of reward like rent, wages, interest and profit.
How the reward of the factors of production are determined according to their contribution in the process of production.
etc.

4. Exchange of Wealth:

How wealth shifts from one hand to another or from one country to another?
How international trade takes place-i.e., how different countries export and import goods and services?
How the currency of a country exchanged with the currency of another country
etc.

MAIN POINTS:

Following are the main points, which are described in the definitions of ecnomics given by the Classical School of Thought.

1. Nature:

Economics treats only material goods like furniture, electronics, house etc. Whereas, immaterial goods like sunlight, moonlight, air, rain and unpaid services are not included in it.

2. Science of Wealth:

Economics is the science of wealth. The term wealth in economics means all the goods and sercices, which directly or indirectly satisfy man's want. Thus, wealth does not mean money.

3. Aspects of Wealth:

Economics treats ith the four main aspects of wealth-i.e., production, distribution, consumption, and exchange.

4. Self-Interest:

People work only for their self-interest. They adopt such ways to collect wealth so that they their standard of living.

ORIGIN OF THE WORD "ECONOMICS"

2010-10-29T00:29:00.001-07:00

The word "economics" is derived from a Greek word "okionomia", which means "household management" or "management of house affairs" -i.e., how people earn income and resources and how they spend them on their necessities, comforts and luxuries. With the passage of time, the word "okionomia" was used for an economy as whole in the sense that how a nation takes steps to fulfill its desires and preferences with the help of scarce means. That's why economics was called political economy in its early ages.

DEFINITIONS OF ECONOMICS:

-Economics is a science, which is concerned with those aspects of social behaviors and institutions that are involved in using the scarce resources to produce and distribute goods and services to satisfy human wants.

-The study of the problem of using available factors of production as efficiently as possible so as to attain the maximum fulfillment of society's unlimited demands for goods & services.

-The science that studies how scarce resources are allocated to meet competing and unlimited wants and how human beings satisfy their material wants and needs.

-The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps its possessor draw correct conclusions.

Definitions According to other Economists

According to Benjamin Davis
"Economics is the science that studies how scarce resources are allocated to meet competing and unlimited wants and how human beings satisfy their material wants and needs."

According to Bradely R. Schiller
"Economics is the study of how best to allocate scarce resources among competing uses."

According to Jackson and Mclver
"Economics is concerned with the efficient use of limited productive resources for the purpose of attaining the maximum satisfaction of our material wants."

In simple words, economics can be defined as;

"Economics is the study of those natural laws which governs production, distribution and consumption of wealth; in economics we study that individual and social behavior of man which satisfy his desires and causes overall economic development."

Thee is no single definition of economics upon which all the economists are mutually agreed. Every definition is criticized by the different economists from different angles. Therefore it is difficult to describe the subject matter of economics in a few words, and proper definition of economics is still a question mark. That's why, perhaps, Keynes was not far wrong when he said "political economy is said to have strangled itself with definitions."