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Lecture 1
Nature of Economics
Definitions
Difficult to Define
• Economists like Pareto, Myrdal and
Hutchinson think that any search for a precise
definition of Economics is a barren enterprise
• Many economists thought it is needless to
waste words in defining Economics
• However, it is essential for a student to have
some definition in mind as working basis
Early Definitions
• According to Adam Smith
– Economics is concerned with an enquiry into nature and causes of
wealth
• Craines in his book said
– Economics deal with the phenomenon of wealth
• According to a French economist J.B. Say
– Economics is science which treats of wealth
• The American Economist, F.A Walker is of the view that
– Economics is that body of knowledge which relates to wealth
• In all these definitions, key position is assigned to WEALTH
Problem with Early Definitions
• Too much emphasis on wealth
• This led to development of view that Economics
teaches selfishness and came to be called a “dismal
science”
• S.Baliey in 1835 discussed the popular view of
Economics as:
– The unworthiness of political economy in public opinion
stemmed directly from its explicit preoccupation with so
degrading a subject-matter as wealth
• Thus, all the vices attributed to wealth became
attached to the science of wealth (i.e Economics)
Change in Definition
• In the last quarter of the 19th Century
humanistic character of Economics had come
to be well recognized
• Schaffle in Germany and Droz in France placed
the role of man in Economics higher than that
of wealth
• It is now fully recognized that wealth is only a
means to an end, the end being human
welfare
Marshallian Definition
• Marshal said
– 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 well-being
Study of Marshall’s Definition
• Marshall’s definition puts emphasizes on four
points:
– Economics does not regard wealth as the be-all and endall of economic activities
– Economics is not concerned with ‘economic man’ but is
concerned with an ‘ordinary man’
– Economics is a social science and not one which studies
isolated individuals
– Economics studies only ‘material requisites of wellbeing’ or causes of material welfare
Criticism on Marshallian View
• Lionel Robbins criticized Marshall’s definition on following grounds:
– It is not right that an economists confine their attention to the study of
material welfare
• because in the actual study of economic principles, both the
‘material’ and non-material things
– Marshall’s definition is classificatory
• because it makes a distinction between material welfare and nonmaterial welfare
– It unduly restricted the scope of Economics
• All those sums which are paid for ‘immaterial’ services e.g. services
of doctors or lawyers etc.
Contd…
Criticism on Marshallian View
– Welfare is too vague and indefinite an idea to provide a sound
foundation for building up a respectable science
• e.g intoxicants are regarded as wealth but cannot be regarded as
good for human welfare
• Idea of welfare vary from age to age, country to country and from
individual to individual
– In assessing welfare, a verdict is needed that what is conductive to
human welfare and what is not
• This would led us to world of ethics where as Economics is neutral
– According to Marshall, Economics deals with persons living in society. It
ignores all others who also may have an economic problem
• i.e. of using scarce means for the satisfaction of unlimited ends
Robbins, Definition
• Robbins defined Economics as
– Economics is the science which studies human
behaviour as a relationship between ends and
scarce means which have alternative uses
Study of Robbins’ Definition
• Robbins’ definition lays down the following three
fundamental propositions which constitute basis
of the structure of economic science
– “Ends” refer to wants. Human beings have wants
which are unlimited in number
– Wants are unlimited but the means to satisfy them
are strictly limited
– Scarce means are capable of alternative uses
• Thus, in Robbins’ sense, economic activity lies in
man’s utilization of scarce means having
alternative uses, for the satisfaction of multiple
ends
Superiority of Robbins’ Definition
• Robbins claimed that his definition is superior to
earlier definition because
– Independent of classification of material and nonmaterial wants
– Takes into account all kinds of wants
– Elevation of economics to a science
– No longer function of economics to judge right or
wrong economic activity
– It transcends the narrow boundaries within which the
materialist definition confined Economics
– Economics to be no longer called “dismal science”
• Thus, the Robbins’ definition is superior both to
the early definition (science of wealth) and
Marshall’s definition (science of material welfare)
Criticism on Robbins’ Definition
• Robbins’ definition attracted following criticism
– Robbins reduced economics to only valuation theory.
• Other aspects of the study of economics have been
relegated to the background e.g aggregates
– Individual choices having no social implications cannot
form the basis of subject-matter of Economics
– Economic growth and economic development has not
been covered by Robbins’ definition
– This definition does not explain problem of
unemployment
– Human touch is entirely missing
– Robbins has made Economics more abstract and
complex and hence difficult and fruitful
Modern Definitions
• The credit of bringing about a revolution in
economic thinking goes to Lord J.M. Keynes.
According to him
– Economics studies how the levels of income and
employment in a community are determined
• Thus, in Keynesian terms, Economics is defined as
– The study of the administration of scarce resources
and of the determinants of income and employment
• In Benham’s words
– Economics is a study of factors affecting the size,
distribution and stability of a country’s national
income
Conclusion Regarding Definition
• There is no short definition of growing science like
Economics would serve the purpose
• One may agree with Prof. Viner that
– Economics is what economists do
– Economists do resource allocation or resource utilisation. They
study size, distribution and stability of national income and
economic growth
• In short, Economics may be defined as
– A social science concerned with the proper uses and allocation
of resources for the achievement and maintenance of growth
with stability
• Prof. Henry Smith defined Economics as
– Study of how in a civilized society one obtains the share of what
other people have produced and of how the total product of
society changes and is determined
Major Economic Problems
• What is an economic problem?
– In view of the scarcity of means at our disposal
and the multiplicity of ends we seek to achieve
– The economic problem lies in making the best
possible use of our resources so as to get
maximum satisfaction in case of a consumer and
maximum output or profit for a producer
Fundamental Problems
• What to produce?
– Quantity and range of goods to produce
– Resources are limited, we must choose between different
alternative collection of goods and services that may be
produced
• How to produce?
– Techniques of production e.g labor intensive, capital intensive
• For whom to produce?
– It means that how the national product is distributed i.e. who
should get how much
• Are the resources economically used?
– No wastage ro misutilization of resources since they are limited
• Problem to full employment?
– Economy must endeavor to achieve full employment not only of
labor but of all its resources
• Problem of growth?
– Economy must expand or develop to maintain conditions of
stability
Nature of Economics
Scope and Method
Two Main Streams
• The study of Economics is divided into two
parts on the basis of looking the system as
whole or in terms of its innumerable decisionmaking units
– Micro Economics
• It is also called Price Theory
– Macro Economics
• It is also called Income Theory
Micro Economics
• The word ‘micro’ means a millionth part
• In ‘micro economics’ we analyze small part or
component of the whole economy
– e.g. individual consumer’s behaviour or firm, price of
particular product or factor of production, employment in
firm or industry
• In simple, micro-economic theory studies the behaiour
of individual decision making units such as consumers,
resource owners and business firms
• The basic assumption in micro economic analysis is full
employment in the economy as whole
Importance of Micro-economics
• It tells us how millions of consumers and producers take decisions
about the allocation of productive resources among millions of
goods and services
• It explains how through market mechanism goods and services
produced in the community are distributed
• It also explains the determination of the relative prices of the
various products and productive services
• It explains the conditions of efficiency both in consumption and
production and departure from the optimum
• Micro-economics helps in the foumulation of economic policies
calculated to promote efficiency in production and the welfare of
the masses
Limitation of Micro-economics
• It cannot give an idea of functioning of
economy as a whole
– An individual industry may be flourishing but
economy as a whole may be languishing
• It assumes full employment which is a rare
phenomenon in the capitalist world
– Therefore an unrealistic assumption
Macro-economics
• Macro economics is concerned with aggregates and
averages of the entire economy
– E.g national income, aggregate output, total employment,
total consumption, savings and investment, aggregate
demand, aggregate supply, general level of prices etc.
• In macro-economics, we study how these aggregates
and averages of the economy as a whole are
determined and what causes fluctuations in them
•
• Macro-economics also analyses the chief determinants
of economic development and the various stages and
processes of economic growth
Importance of Macro-economics
• It is helpful in understanding and functioning
of a complicated economic system
– It gives bird’s eye view of the economic world
• It is useful in framing economic policies for the
nation
• Macro-analysis also occupy an important
place in economic theory in its pursuit of the
solution of urgent economic problems
– These problem relate to aggregate output,
employment and national income
Limitations of Macro-economics
• Individual is ignored
– It is individual welfare which is the main aim of
Economics
• The macro-analysis
differences
overlooks
individual
– e.g. general price level may be stable but the
prices of food grains may have gone spelling ruin
to the poor
Integration of
Macro and Micro-economics
• Neither the two approaches (micro and macro) can
alone adequately help us in analysing the working of
the economic system
• It is, therefore, essential to integrate two approaches
• Ignoring one and exclusively concentrating attention on
the other may often lead not only inadequate or wrong
explanation but also to inappropriate or even
disastrous remedial measures
Is Economics Science or Art?
• By science we merely understand a systematized body of
knowledge.
– It is not merely collection of facts but the facts so arranged
that they speak for themselves.
– That is how laws are discovered which explain and elucidate
the facts.
– When laws are formulated then a branch of knowledge
become a science
• Judged by this standard, Economics is certainly science.
– The economist collects the facts, facts have been carefully
analyzed and put under suitable classification, and general
principles governing these facts have been discovered and
enunciated
• Economics is not only science but also an art
– It is a science in its methodology and an art in its application
Positive or Normative Science
• Whether Economics is Positive Science or Normative
Science?
– Positive science explains WHAT IS
– Normative science explains WHAT OUGHT TO BE i.e right
or wrong of a thing
– In simple words, positive science ‘describes’ while
normative science ‘evaluates’
• Some early economists, like J S Mill, Robbins, Craines;
were of the view that Economics is just a positive
science
• However, Cairnes and Macfie talked about normative
character of Economics
Can Economics Solve Practical
Problems?
• Kenyes said
– The theory of Economics does not furnish a body
of settled conclusions immediately applicable to
policy.
– It is a method rather than a doctrine, an apparatus
of the mind, a technique of thinking which helps
its possessor to draw correct conclusions
Limitations of Economics
• Economics cannot predict the future events
since its laws lack definiteness
• No magic formula by which schemes of social
betterment can be tested nor a sovereign
remedy to economic ills
• It is not business of the economist as such to
decided whether large armaments are
necessary or not
Laws of Economics
• Like every other science, Economics, too has drawn its own set of
generalizations, which are called laws of Economics
• The nature of economics law is not indicated by the word
– “must”, as in the case of statute law, or
– by “ought” as in the case moral law;
– But their nature is indicated by phrase “other things being equal”
• Economics laws lacks definiteness and exactitude
• Economics laws are said to be hypothetical or conditional since
their validity depends on fulfillment of certain conditions
• Economic laws are inevitable and inescapable if some necessary
conditions are fulfilled
– But these conditions are not always fulfilled
– Therefore, economic laws lack predictability
Basic Assumptions in Economics
• There are three broad assumptions
– Behaviour of individuals
• i.e. they behave in a rational manner
– Consumer needs maximum satisfaction, labour purse for
higher wages and entrepreneur seeks maximum profits
• It is called maximization principle
– Consumers tastes remain unchanged for fairly
long periods of time
– There is a perfect competition in the economy
Methods of Economics
• Like other sciences Economics also uses
scientific methods. These methods are:
– Deductive Method
– Inductive Method
– Proper Method
Deductive Method
• Economists of Classical School tried to build up the science of Economics
from few simple generalizations
– e.g. self-interest alone guides men in their daily life and they try to explain and
predict all human behavior in terms of self interest
• Classical economists by and large supported this method
• Merits of Deductive Method
– Useful in analyzing complex economic phenomenon
– This method yields exact and true conclusions
• Provided the premises on which they are based are true
– It is very simple and easy of application
– When data is not available or inadequate then this method is useful for
drawing inferences
• Limitations of Deductive Method
– There is a big ‘IF’ in applying deductive method
• i.e. if those assumptions are correct
– This method made Economics dogmatic
– This method is dangerous when universal validity is claimed for generalizations
based on imperfect or incorrect assumptions
Inductive Method
• Historic school represents reaction against the dogmatic attitude of
followers of deductive method
• This method insists on the examination of facts and then laying down
general principles
– Here we go from “particulars” to “generals”
• Merits
– This method can be applied for the verification of conclusions based on
deductive reasoning
– Economic phenomenon is too complex for deductive reasoning. It is better
to use inductive method
– This method is more suitable and useful in the formulations of economics
policies
• Limitations
– This method dangerous when hurried conclusions are drawn on
insufficient number of facts
Proper Method
• The modern economist does not rely on one
method. He uses both. It is said
– “Induction and Deduction are both needed for
scientific thought as the right and left foot are
both needed for walking”
• The deductive method seems to be more
suitable in the field of pure theory and
inductive method for formulating practical
policies
Thank You