Lesson 1: Definition and nature of economics

Video Lesson:

Competency (MLC)

Dear learner,

At the end of this lesson, you will be able to:

• Define Economics.
• Explain the two key factors essential for the existence of economics.

Brainstorming Question

What comes to your mind when you hear the term economics?

Key Terms

1.1 Economics

Dear learner, Many people study economics for various reasons. Some people want to study economics because they hope to make money. Others feel they need to study economics because they would feel illiterate if they did not understand the law of demand and supply. Many want to learn economics to understand how inflation and budget deficits will affect their future lives.

Generally, knowledge about economics is important because everyone faces economic problems at different levels and makes economic decisions throughout their life, knowingly or unknowingly.

If someone enters into business, they will face many economic decisions like: What to produce or what type of service to provide? How and in what quantity to produce? And so on. In politics, we face many economic decisions like how much the nation should spend on defense, healthcare, the environment, education, and different physical infrastructure. Even as voters, we evaluate candidates partly based on their economic views—specifically, their views on unemployment, inflation, and overall socio-economic programs.

In short, economic literacy is important because the economic issues facing governments and individuals shape the future of the nation and affect the well-being of its citizens. Therefore, for these and similar reasons, economics must be made accessible to everyone.

What is Economics?

Throughout history, the definition of economics has evolved, reflecting various perspectives and priorities. The word “economics” originates from the ancient Greek term “oikonomia“, which means the management of a household or family. However, there is no universally accepted definition of economics, as it remains a subject of debate. As a result, economics can be defined from different viewpoints, depending on the context and focus.

1.2 Wealth Definition: Adam Smith (1723-1790)

The formal definition of Economics can be traced back to the days of Adam Smith, a Scottish Economist, generally known as “father of economics”. Wrote a book entitled “An Inquiry into the Nature and Causes of Wealth of Nations”, in the year 1776. Economics as a distinct subject started with his book.

Economics is a science of wealth which studies the process of production, distribution, consumption and accumulation of wealth. However, the Smithian wealth definition did not serve last long and got criticism from other groups of economists (mainly by Alfred Marshal).

1.2.1 Critiques

• The definition is too narrow: Does not consider the major problems faced by a society, and is condemned as ‘the bread-and-butter science’.
• Emphasize the material aspect of human life, i.e., generation of wealth; ignore the non-material aspect of human life. Above all, as a science of wealth, it taught selfishness and love for money. Criticized as a “dismal science and bastard science”
• Ignored Scarcity and Choice aspects. Scarcity is the fundamental economic problem of any society, and thus, choice is unavoidable.

1.3 Welfare Definition: Alfred Marshal (1842-1924)

Marshall defines economics as “a study of peoples’ activities/actions to achieve human welfare”. Alfred Marshall in his book ‘Principles of Economics” published in 1890 placed emphasis on human activities or human welfare rather than on wealth. From the United Nations Development Program UNDP perspective, human welfare is primarily a matter of education, health and income, as reflected in the Human Development Index (HDI), a composite of three social welfare variables (a long and healthy life, acquisition of knowledge and a decent standard of living).

He argued that economics, on one side, is a study of wealth and, on the other side, is a study of man.

1.3.1 Critiques

• Robbins argued that Marshall could not establish a link between the economic activities of human beings and human welfare. Various economic activities are detrimental to human welfare. The production of war materials, wine, etc., are economic activities but do not promote welfare of any society.
• Ignores the fundamental concepts/problems of scarcity and choice.

1.4 Scarcity Definition: Lionel Robbins (1898-1984)

Robbins defined Economics in terms of the allocation of scarce resources to satisfy human wants in his book entitled “An Essay on the Nature and Significance of Economics Science” in 1932.

• According to Robbins, neither wealth nor human welfare should be considered as the subject matter of economics.
• His definition runs in terms of scarcity: “Economics is a branch of social science that studies the efficient allocation of scarce resources so as to attain the maximum fulfilment of human needs.”

By considering the basic economic problem, which is scarcity, Robbins brought Economics to nearer science and his definition is the most accepted definition of Economics.

However, the scarcity definition of Robbins is also not free of criticism. Argue Economics to be as positive Economics (Ignore the normative aspect of economics or policy formulation).

• Gave less emphasis to wealth and welfare.

However, still, Robbin’s scarcity definition is a suitable definition of economics, His definition runs in terms of scarcity:

“Economics is a branch of social science that studies the efficient allocation of scarce resources to attain the maximum fulfilment of human needs. As a science of choice, economics studies how people choose to use scarce or limited productive resources (land, labor, equipment, technical knowledge, etc.) to produce various commodities.”

The following statements are derived from the above definition of economics:

•  Studies about scarce resources
•  It studies about allocation of resources
•  Allocation of resources should be efficient
•  Human needs are unlimited

The aim (objective) of economics is to study how to satisfy the unlimited human needs up to the maximum possible degree by allocating the resources efficiently.

There are two fundamental facts

• Human (society‘s) material wants are unlimited. wants multiply—luxuries become necessities.
• Economic resources are limited (scarce).

Scarcity is a universal challenge faced by every country and region, necessitating decision-making by governments, businesses, and individuals on allocating these limited resources. This allocation process involves making choices and trade-offs to prioritize certain uses over others. Economists study these decisions and their consequences to understand how resources can be allocated most efficiently to satisfy the unlimited wants and needs of individuals and society. The concept of unlimited human wants underscores the fact that human desires and needs are boundless. These wants encompass a wide range of material goods, services, experiences, and intangible aspects such as love, recognition, and security. They vary among individuals and societies and are continuously expanding.

Economics plays a crucial role in maximizing the satisfaction of these unlimited human wants by efficiently allocating scarce resources. Through the study of economics, we gain knowledge of economic behavior, analyze and predict economic phenomena, address the challenge of scarcity, and provide guidance for policy decisions and economic solutions.

1.5 Nature of Economics

Economics has been perceived in various ways throughout history, leading to ongoing debates about its nature as a discipline. This discussion revolves around whether economics is a science or an art, acknowledging the distinct elements that contribute to both perspectives.

1.5.1 Economics as a Science

Science organizes knowledge to explain causes and effects. In economics, facts are systematically analyzed to make predictions, making it a science.

Systematic Observation:

• Economists observe economic activities and collect data to identify patterns and trends.

Quantitative Methods:

Using statistical analysis and mathematical models to quantify economic behavior.

Empirical Evidence:

Relying on data and empirical studies to validate theories and hypotheses.

Predictive Power:

Developing models to forecast economic outcomes and test hypotheses.

These methods allow economists to develop theories and frameworks to explain and predict economic behavior, applying rigorous and objective analysis similar to other scientific disciplines.

1.5.2 Economics as an Art

Conversely, Art involves techniques for solving problems. Economics provides methods to address issues like unemployment, poverty, and inflation, making it an art. This involves:

Decision-Making:

Making choices and formulating policies based on subjective values and preferences.

Qualitative Analysis:

Considering ethical, social, and political factors in economic decisions.

Policy Formulation:

Designing strategies and interventions that address economic issues within the context of societal norms and dynamics.

The art side acknowledges that economic problems often require solutions that go beyond empirical data, involving human judgment and subjective considerations.

1.5.3 The Dual Nature of Economics

The debate about whether economics is a science or an art highlights the dual nature of the discipline:

Scientific Elements:

Objective analysis, empirical methods, and theoretical frameworks.

Art Elements:

Subjective interpretation, ethical considerations, and policy-making.

Economics draws on scientific methodologies to analyze and understand economic phenomena while incorporating art elements to address real-world complexities. The balance between these elements varies depending on the specific topic, context, and approach of economists.

In conclusion, the lack of uniformity in defining economics stems from the evolving nature of the subject and the diverse approaches taken by economists over time. Recognizing both the scientific and art aspects of economics helps us appreciate the discipline’s rich and multifaceted nature. This dual perspective enriches our understanding and ability to address complex economic issues effectively.