NATURE AND SCOPE OF ECONOMICS

ECONOMICS AS A SCIENCE AND AN ART

There is a great controversy among the economists regarding the nature of economics,
whether the subject ‘economics’ is considered as science or an art. If it is a science, then either
positive science or normative science.

ECONOMICS AS A SCIENCE
Before we start discussing whether economics is science or not, it becomes necessary
to have a clear idea about science. Science is a systematic study of knowledge and fact which
develops the correlation-ship between cause and effect. Science is not only the collection of
facts, according to Prof. Poincare, in reality, all the facts must be systematically collected,
classified and analyzed.

There are following characteristics of any science subject, such as;

(i) It is based on systematic study of knowledge or facts

(ii) It develops correlation-ship between cause and effect

(iii) All the laws are universally accepted

(iv) All the laws are tested and based on experiments

(v) It can make future predictions

(vi) It has a scale of measurement.

On the basis of all these characteristics, Prof. Robbins, Prof Jordon, Prof. Robertson etc.
claimed economics as one of the subject of science like physics, chemistry etc. According to
all these economists, ‘economics has also several characteristics similar to other science
subjects.

a) Economics is also a systematic study of knowledge and facts. All the theories and facts
related with both micro and macroeconomics are systematically collected, classified
and analyzed.

b) Economics deals with the correlation-ship between cause and effect. For example,
supply is a positive function of price, i.e., change in price is cause but change in supply
is effect.

c) All the laws in economics are also universally accepted, like, law of demand, law of
supply, law of diminishing marginal utility etc.

d) Theories and laws of economics are based on experiments, like, mixed economy to is
an experimental outcome between capitalist and socialist economies.

e) Economics has a scale of measurement. According to Prof. Marshall, ‘money’ is used

as the measuring rod in economics. However, according to Prof. A.K. Sen, Human
Development Index (HDI) is used to measure economic development of a country.

ECONOMICS AS AN ART
According to Т.К. Mehta, ‘Knowledge is science, action is art.’ According to Pigou,
Marshall etc., economics is also considered as an art. In other way, art is the practical
application of knowledge for achieving particular goals. Science gives us principles of any
discipline however, art turns all these principles into reality. Therefore, considering the
activities in economics, it can claimed as an art also, because it gives guidance to the solutions
of all the economic problems. Therefore, from all the above discussions we can conclude that
economics is neither a science nor an art only. However, it is a golden combination of both.
According to Cossa, science and art are complementary to each other. Hence, economics is
considered as both a science as well as an art.

NATURE OF ECONOMICS: POSITIVE OR NORMATIVE SCIENCE

A discussion on the nature of economics analysis leads us to the controversial problem

whether the economics analysis ‘be positive or normative’. As per the research method,
economic analysis can be divided into two types “Positive or Descriptive Analysis”
“Normative or Value Analysis”. A major difference between economics and natural science is
that the latter only makes positive analysis while the former involves both positive analysis and
normative analysis in its discussions.

This dispute is as old as economics itself. The old English Classical School held that
Economics was purely a positive science and economists had no right to comment upon the
ethical aspect of economic phenomena. But the Historical School of Germany held the opposite
view and affirmed that Economics should not consider itself apart from ethical considerations.
In order to understand this controversy, we should know the meaning and significance of the
two terms ‘Positive’ and ‘Normative’.

Economics is a Positive Science:

Positive analysis only explains ‘what economics is’. It only offers the facts and gives
explanations (thus verifiable), but does not make value assessment to economic phenomena.
For example, an important task of modern economics is to describe, compare and analyze such
phenomena as production, consumption, unemployment and price, and to predict possible
outcomes of different policies. Consumer theory, theory of the firm and game theory are typical
examples of positive analysis.

According to J.N. Keynes, ‘A Positive science may be defined as a body of

systematized knowledge concerning ‘what is’. Explaining further, the object of positive science
is the establishment of uniformities. Positive science deals with causes and effects without
passing any moral judgement or comment on the desirability of having certain ends. In short,
positive science remains neutral between ends.

Positive Economics strongly advocates N. Senior, J.S. Mill and Lionel Robbins. N.
Senior said, “An economist is not authorized to add even a single word of advice”.

Economics is a Normative Science:

Normative analysis makes judgments on economic phenomena. It’s not only explaining
what economics is, but also provides ‘Opinions or Value Judgments’. They depend upon our
judgements about what is good and what is bad Therefore, it always involves value judgments
and preferences of the economists and is thus not verifiable through facts. For instance, some
economists lay more emphasis on economic benefits while others focus on equality or social
justice and consequently there is lot of scope for disagreement as the ideas of good and bad not
only become subjective but also varied in concepts.

According to J.N. Keynes, ‘A Normative science or Regulative science is a body of

systematized knowledge relating to the criteria of ‘what ought to be’ and concerned with the
‘ideal’ as distinguished from the actual’. Keynes says that the object of a normative science is
the determination of ideals. In short, normative science deals with things as they ‘ought to be’.
It discusses the moral rightness or otherwise of the end result.

There are large numbers of economists who advocate normative functions to

economics. Hawtrey, Fraser, Wolfe and Paul Streeton put forward well-fortified arguments for
normatism.

Both Positive and Normative Science

With the differences between the two methods in mind, we can avoid many
disputes while discussing economic issues. Economic mechanism design theory is a typical
example of normative analysis. Positive analysis is the foundation for normative analysis, while
normative analysis is the extension of positive analysis. In this sense, economics has developed
along positive and normative lines. Both these aspects have grown inseparably. The role of an
economist is not only to explain and explore i.e. positive aspect but also to admire and condemn
i.e., negative aspect. This role of an economist is essential for a healthy and rapid growth of an
economy. For examples of statements which contain both positive and normative economics
are:

➢ A rise in the price of a good leads to a fall in its quantity demanded, therefor,
Government should check rise in prices.
➢ Indian economy is a developing economy and the government should make it
developed through correct planning.

In the above examples, the first part of the statement is positive giving facts and the second
part is normative based on value judgments.
SCOPE OF ECONOMICS

The scope of economics means “the limits of its subject matter”. From the definition
we can understand the scope of economics. Such as:

▪ It studies man in the ordinary business of life and how he earns his income and how he
satisfies his wants.
▪ It is concerned not with individual action but with social actions.
▪ It studies how wealth is produced with limited resources in order to satisfy human
wants.
▪ It studies about problems arising out of multiplicity of wants and scarcity of resources
which satisfy these wants.
▪ It studies how wealth is produced, consumed, exchanged and distributed.

Based on the “Subject Matter” of this science, Economics is divided into following
“Divisions”

a) Consumption – it deals with satisfaction of human wants is called consumption, which

forms the important branches of economics. This tells how people behave in
consumption of goods and services in order to maximize their satisfaction. Existence
of human wants is the starting point of economic activity. In this, we study about the
consumption of wealth, characteristics of human wants, the behavior of the consumer,
diminishing utility and consumer’s surplus etc.
b) Production – it deals with goods and services have to be produced with the help of
factors of production. This tells how maximum goods are produced with minimum cost
or how the scarce factors could be utilized economically for better results. This division
covers the factors of production viz. Land, Labour, Capital and Organisation. The laws
governing production, mobility of factors, the role of factors etc.
c) Exchange – refers to the movement of goods or services from the producer to the
consumer. it deals with goods and services cannot be produced at one place or at one
point of time. Goods produced by one are exchanged for the goods produced by the
other. Consumption will be possible only if the produced commodity is placed in the
hands of the consumer. In this division, we study about trade and commerce, money
and banking.
 d) Distribution – it deals with goods and services are produced with efforts i.e. by
combining the factors of production. These efforts have to be paid for or rewarded. The
land gets rent, labour by wages, capital gets interest and the organizer by profit.
Distribution studies about the pricing of factors production.
e) Public Finance – it deals with the sources of revenue to the government and the
principle governing expenditure for the benefit of the people. It studies about public
debt and financial administration. This tells about taxation and expenditure, budgeting
and financial administration. Public finance has been separated and is treated as an
independent branch.

The subject matter of economics encompasses a very broad field of study. All the divisions
of economics are inter-related and interdependent.

IMPORTANCE & SIGNIFICANCE OF THE STUDY OF ECONOMICS

From this we can understand the importance of the study of the subject. No subject of
the present day is so important as economics. Economics governs the ‘Life of the Individual’,
‘Society’ and ‘Modern States’. The subject plays a significant role in the international affairs.
The knowledge of economics helps in solving many problems and the study has practical
advantages.

➢ Economics studies the vital question of satisfying human wants with scarce resources.
The present-day poverty and the poor standard of living of the people of many
backward countries are due to poor resources, less production and lack of technology.
The knowledge of economics is essential to conquer poverty of the millions of people
and to raise their standard of living.
➢ The knowledge of the subject tells how the complex forces work in the economic
systems. It explains the relationship between the producer and consumer, the labour
and the management etc. it explains how the action in one sector affects the other sector.
Without the knowledge of the working of the economic systems, administration will
not be effective and it may even be impossible.
➢ In practical life, the subject helps the businessman, the industrialist and the banker as
well as the labour leader. It gives the businessman and industrialists the knowledge of
modern methods of production and production at low cost.
 ➢ Economics is useful to the householder. With the knowledge of economics, the
householder is able to utilize his little income to get the maximum satisfaction for his
family by proper budgeting and careful spending. This increases the happiness of the
family.
➢ By studying economics, we can discover new factors that may lead to increase the
national wealth. Modern governments are actively engaged in economic planning. The
purpose of planning is to remove poverty by increasing the national income and wealth
and also by effectively distributing the wealth. Without the knowledge of economics,
this is absolutely impossible.
➢ The knowledge of economics is very essential for the Finance Mister. It helps in
framing the system of taxation. It helps in formulating the budget for development and
for removing unemployment. Supply of money, effective credit system, efficient
working of the banking system can be had in the country only by having a thorough
knowledge of economics by the people who administer these sectors.
➢ The knowledge of economics is very essential for the legislators and parliamentarians.
They will be able to frame laws effectively only by having knowledge of the subjects.
As citizens and voters and people electing the representatives, the knowledge of
economics will be much helpful. It will help the people to understand many economic
programmes presented by the political parties in their ‘Election Manifestoes’. The
people can wisely judge the truth of the statements in the manifestoes.

Economics is not a bundle of theories and principles. It is a practical social science. The
study of the subject is not undertaken merely for the sake of knowledge. It is done to lay down
principles and policies for removing poverty and increasing human welfare.