Origin, Meaning, Nature and Scope of Economics

Introduction

Man is the social animal. The social nature of man and the instinct of living together and

cooperating with one another, needs adjustment of behavior according to some accepted rules

(Yadder, 1999). This relationship of dependence of man on each other has been growing and

developing with the development of civilization and culture. It is not only growing but also

becoming complex.

Economics is a dynamic science and it is acquiring new dimensions with the passage of time. In

the words of DURBIN, “Economics is the intellectual religion of the day.”

Initially this challenging science was named as Oikonomos, i.e. “The Management of Home

Affairs.” Later, a well-known economist David Ricardo called it “Political Economy.” With the

passage of time, it was realized that political affairs and economic affairs should be discussed

separately. Thus “Political Economy” was divided into two separate branches of science, i.e.

“Political Science” and “Economics”.

Definition of Economics

Economics can be defined as the study of how to allocate scarce recourses to satisfy unlimited

Wants and needs. It is the study of how people, institutions, and society make choices under
conditions of scarcity.

Scarce resources are such things that command price even though they may be in abundance.

These may include things such as raw materials, energy, land and labour that can be used to

produce goods and services that satisfy human wants and needs.

Various economists have defined Economics in their own ways. There is no single definitions of

Economics on which all economists agree. Dr. Keynes has rightly pointed out that: “Political

Economy is said to have strangled itself with definitions.”

There are prominent economists like, Yadder (1999), Economics deals with the study of various

activities of man directed towards acquisition of wealth and earning of the money. L.M. Fraser

divided these definitions of Economics into two categories: First category is related to material

welfare while the second category is related to scarcity of means. We discuss these categories of

definitions under three schools of thoughts.

i. Classical school of thought;

ii. Neo-Classical school of thought; and

iii. Modern school of thought.

Now we critically analyze all the definitions by various schools of thoughts.

Classical Definition

Adam Smith, a Scottish professor of philosophy, is considered the representative of classical

school of thought. He wrote first-ever regular book on traditional economic literature entitled

“An Enquiry into the Nature and Causes of Wealth of Nations” in 1776.Hence he is known as

“Father of Economics”. He divided his book into four sections, i.e.

i. Production of wealth;

ii. Consumption of wealth;

iii. Exchange of wealth; and

iv. Distribution of wealth.

Thus “wealth” stands at the heart of Economics and according to classical economists,

“Economics is a science which deals with wealth.”

Many other prominent economists like J.B. Say Ricardo Malthus, Walker etc also favoured Adam

Smith’s view point.

According to J.B. Say, “Economics is a science of wealth”

Prof. J.S. Malik, “Economics is the science of wealth in relation to man”.

F.A Walker writes that: “Economics is that part of knowledge which relates to wealth.”

Hence classical economists are of the opinion that all economic activities revolve around the

concept of wealth. We have four basic functions of any economy; i.e. production, consumption,

exchange and distribution and all these functions are based on the concept of wealth.

Misinterpretation of the Concept of Wealth:

The over-stressed concept of wealth was misinterpreted by fundamentalists and social reformers

like Carlyle and Ruskin. They tried to confine the concept of wealth to money and gold only

whereas wealth is a comprehensive term and it is used for all those goods and services which

have the following three characteristics:

i. Utility, i.e. the power to satisfy any economic want;

ii. Transferability, i.e. the transformation from one sector to another sector or from one region to

another region; and

iii. Scarcity, i.e. a situation in which demand is greater than supply.

Due to this misconception, the definition introduced by Adam Smith and favoured by other
classical economists was harshly criticized. The critics like Carlyle and Ruskin called it “Dismal

Science” which teaches mammon worship, “Science of Bread and Butter” which preaches

materialism and Carlyle crossed all the limits when he called Economics “A Pig Philosophy.”

Such a harsh criticism was quite unjustified. It looks astonishing that men of letters like Carlyle

and Ruskin could not understand the real sense of the term “wealth.” Either it was jealousy factor

or the misconception of the concept of wealth, this propaganda led to underestimation of the

importance of the subject. Perhaps it was too early to propound such a sophisticated definition of

Economics.

CRITICISM

Though it is a sophisticated definition, yet it is not free from the following restrictions.

1. Man is more important:

This definition gives more importance to wealth while man is more important and wealth is only

a source to satisfy human wants.

2. Unclarified concept of wealth:

The pivot of this definition is the concept of wealth but this central concept remains unclarified

due to which harsh criticism appeared.

3. Ignores means:

There is much roar of wealth in this definition but how to earn wealth; this definition is silent

about it.

4. Narrow scope:

It is a controversial and unscientific definition due to which its scope remains narrow.

5. Misconception of economic man:

Adam Smith is of the view that a self-centred person is an economic man while A.C. Pigou and

other modern economists are of the opinion that a rational person is an economic man.

6. Not comprehensive:

Adam Smith considers only material goods as wealth whereas modern economists treat both

goods and services as wealth.

7. Wealth – Not the sole end:

Adam Smith pointed out that wealth is the sole end of all economic activities. Robbins and other

modern economists believe that we have multiple ends in human life.

8. Wealth – Not the sole sources:

Despite all these flaws, Adam Smith’s definition of Economics proved a foundation stone in

Economics literature.

Neo-Classical Definition

Though a harsh criticism over Adam Smith’s controversial definition brought about a bad repute

of Economics, yet it started a tradition to define Economics. Dr. Alfred Marshall (1842-1924), a

British Economist of Cambridge University, defined Economics in his book “Principles of

Economics” published in 1890. Marshall’s definition was based on the concept of human

material welfare. Hence Marshall and his followers, i.e. Cannon, Pigou etc were called “Welfare

Economists.”

According to Dr. Marshall,

“Economics is the study of man in ordinary business of life. It enquires how he gets his income

and here 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 wellbeing………………..It is
the study of wealth on one side and on the other side, which is more

important, it is a part of the study of man.”

Simply speaking, Marshall is of the view that:

“Economics is a science which deals with human material welfare.”

MAJOR FEATURES

1 Social science:

Economics is a social science because it is the study of ordinary business of life. An isolate

person is not the subject matter of Economics.

2. Income pattern:

Income pattern is the major concern of Economics.

3. Individual & collective efforts:

Both individual and collective (i.e. micro and macro) activities are discussed in Economics.

4. Material welfare:

All economic activities revolve around the major concern of material welfare. Economics has no

concern with non-material welfare.

5. Prime importance of man:

Wealth is not the end of all human activities; it is only a source to maximize human material

welfare. Hence prime importance goes to man; and not to wealth.

6. Normative science:

Major focus on material welfare reveals that Economics is a normative science.

MERITS

Marshall has enriched the definition of Economics with the following merits.

1. Social science:

Marshall has given the status of social science to Economics as he considers it a science which

deals with individual and social action of ordinary business of life.

2. Removes misunderstanding:

Adam Smith’s definition created a misunderstanding towards the subject matter of Economics

but Marshall removed it and gave Economics a very important status.

3. Micro and macro activities:

Marshall considers not only individual efforts but also collective efforts for the attainment of

material welfare.

4. Human welfare:

Marshall concentrates on human welfare in his definition which is the ultimate objective of all

economic activities.

5. Corresponds to modern economic theories:

Human material welfare is the pivot of Marshall’s definition which corresponds to modern

economic theories.

6. Declares status of wealth:

Methodology of teaching economics Lecture notes by faridanakaw31@gmail.com 12

Adam Smith believes that wealth accumulation is only the source of human happiness while it is

an established fact that we cannot achieve it until and unless we strictly observe moral and

spiritual values.

CONCLUSION

This definition declares that wealth is not the sole end of all economic activities and it cannot be

preferred to man. It is only a major source of human material welfare.

7. General approach:

Marshall’s definition is general in approach because in this definition we study ordinary business

of life. We do not confine ourselves to economic activities of a selected group or commodity

subject to certain constraints.

8. Leads to definite aim:

According to Marshall, we do not study Economics just for knowledge sake but we have to be

very particular about our definite aim, i.e. material welfare.

DEMERITS

Marshall’s definition of Economics has following demerits:

1. Vague concept of welfare:

Material welfare is the pivot of Marshall’s definition of Economics. It is purely a subjective term

and it varies from man to man, place to place and country to country.

2. Isolated person – Not considered:

This definition focuses on ordinary business of life and an isolated person is not considered

whereas an isolated person has also economic problems.

3. Welfare – Not measurable:

According to Lord Kelvin,

“Your knowledge is of meager and unsatisfactory kind if you cannot measure what you are

speaking about” The central theme of Marshall’s definition i.e. welfare is not measurable. Hence

it is an unsatisfactory definition. Robbins argues that:

“If Economics is to be called a science, we should not talk of welfare at all”

4. Narrow down the scope of Economics:

Marshall’s definition is concerned with material requisites. He has ignored non- material

requisites, i.e. services for human welfare. Hence he has restricted the scope of Economics.

5. Involves likings and disliking:

The word “welfare” in the definition involves value – judgment, i.e. personal assessment or

personal opinion about something. Robbins says that an economist must be neutral and he should

not comment about something.

6. Impracticable:

Marshall classifies economic activities into two categories:

i. Activities which promote material welfare

ii. Activities which do not promote material welfare

It is not possible in practice to divide the activities of an individual into material and non

material categories.
7. Problem for policy making:

“Welfare” is purely a relative term based on liking and disliking. It creates problem for the

government in framing economic policies. For example, some people may object the production

of cigarette on the ground that it retards welfare but on the other hands some people may

appreciate its production as they get satisfaction by this product.

8. Not comprehensive:

It is not a comprehensive definition as it considers material requisites and ignores non – material

requisites, i.e. services of doctors, engineers, professors etc. for human welfare. Moreover, it

considers material welfare only and ignores non-material welfare.

9. Ignores ethics / values:

Marshall does not keep into account the observation of ethics, moral values, and customs etc.

which are the origin of an individual’s activities.

10. Partial classification:

Marshall includes in his definition of Economics only those products which promote material

welfare and excludes those products which do not promote material welfare. This partial

classification is not justified.

Robbins contends: “Just satisfy wants and don’t bother whether they are for the better or the

worse” is enough to discard Marshall’s definition of Economics. He adds,

“Why talk of welfare at all? Why not throw away this mask altogether?”

Methodology of teaching economics Lecture notes by faridanakaw31@gmail.com 14

Thus Robbins rejected the concept of material welfare as the base of definition of Economics. He

introduced a new definition of Economics in his book, “Nature and Significance of Economics

Science”, published in 1932.

CONCLUSION

In spite of all above-mentioned flaws, the definition of Economics introduced by Marshall is

considered a valuable asset in Economics literature. It is consensus by all economists that

welfare is the ultimate objective of all economic activities. The concept of welfare not only

upgraded the status of Economics but also opened a gate-way for modern Economics.
Modern Definition

Lionel Robbins, a well – known British economist of London School of Economics wrote a book

entitled “Nature and Significance of Economics Science” in 1932. He harshly criticized

Marshall’s definition of Economics in his book and presented a new definition as under:

“Economics is the science which studies human behavior as a relationship between multiple ends

and scarce means which have alternative uses.”

Simply speaking,

“Economics is a science of choice and scarcity.”

MAJOR FEATURES

The salient features of Robbins’s definition are as under:

1. Multiple ends:

Everybody is confronted with multiple ends or unlimited wants. These wants increase in quantity

and quality over time, even some wants occur again and again. When one want is satisfied, other

wants occur and this process goes on forever. No one can claim that all his wants have been met.

2. Unequal and varying Importance:

All wants are not equally important. Some wants are more important than others. People arrange

their wants in order of preference as (a) basic needs (b) comforts and (c) luxuries. Most urgent

wants are satisfied first and less important wants are satisfied later. For example, the want of

food is more important than the want of TV. Hence the want of food is met first than the want of

TV. Moreover, importance of wants varies with the passage of time and with the change of

sources.

3. Scarce means:

Scarcity of means shows a situation where resources are limited to meet unlimited wants. Means

or resources always remain scarce to meet unlimited wants. Scarcity is a fact of life. It is equally

applicable to the poor and the rich. Even the richest person of the world cannot get rid of

scarcity.

4. Alternative uses:

There are alternative uses of scarce resources. For example, electricity can be used for industrial,

commercial or domestic purpose. Similarly, land can be used for agriculture, industry or housing.

A student may spend his money to take meal, or to purchase book or to entertain himself along

with his fellows. Particular resource can be used to satisfy only one want at a time; we cannot
meet any other want at the same time with the same resource. Moreover, first of all, top priority

want is met by the given limited resource.

5. Problem of choice:

Within the constraint of limited resources, an individual has to face the problem of choice, e.g.

selection of the best possible use of scarce means to satisfy the most urgent want. It leads

towards an economic problem. Every rational individual adopts an attitude to tackle this

economic problem. According to Robbins, Economics is the study of that human behavior which

is adopted to satisfy the economic problem.

MERITS

Robbins definition is superior to other definitions due to the following merits:

1. Neutral:

Robbins has given Economics the status of positive science. According to him, Economics has

nothing to do with liking or disliking, material welfare or non-material welfare etc.

2. Scientific:

This definition is scientific as it is not based on a vague and immeasurable concept of welfare but

it is based on the concept of scarcity which is measurable.

3. Realistic:

This definition describes an established reality that every individual has unlimited wants and

limited resources.

4. Universal:

This definition describes the universal fact that every individual has unlimited wants and limited

resources.

5. Wider in scope:

This definition has extended the boundaries of Economics. Both material and non-material

activities are discussed in it.

6. Precise:

Economic problem, the pivot of all economic activities, has been precisely and comprehensively

described in this definition.

7. Analytical:

This definition is analytical as it analyzes human behaviour as a relationship b/w multiple-ends

and scarce means which have alternative uses.

8. Explicit:

Robbins definition is clear on the nature, scope and subject matter of Economics.

9. Systematic:

Robbins has developed the definition in a systematic manner on the basis of established realities

of unlimited wants and limited resources.

DEMERITS

Certainly, Robbins definition is superior to earlier definitions but it is not free from the following

demerits:

1. Economics – Not a natural science:

Robbins considers Economics as natural science like Physics, Chemistry etc while Economics is

based on social behavior of human being. Hence Economics is not a natural but a social science.

2. Economics – Not a positive science:

Robbins considers Economics as positive science. He says that it should only describe the facts

as they are. But Post–Robbins modern economists are of the view that Economics is not only

positive but also normative science. Elley says that “Economics is something more than a

science.”

Similarly, Wootton and Thomas are of the view that “Function of an economist is not only to

explain and explore but also suggest solution of economic problems.”

3. Micro analysis:

Robbins ignores macro aspect of Economics. He is concerned with individual behavior.

Economic problems are social rather than individual.

Cairn-cross in his book “Factors of Economic Development” writes that “Individual choices

having no social implications cannot form the subject matter of Economics.”

4. Undue wider scope:

Robbins has made the study of Economics too wider. Robbins has discussed the wants in

general. He has not specified wants which should be discussed in Economics. Hence, Robins has

widened the scope of Economics unnecessarily.

5. Ignores key-concepts:

Robbins has explained that how resources are allocated but he is silent about the major concepts

like national income, economic development, unemployment, inflation etc.

6. Only a valuation theory:

Robbins has made Economics only a valuation theory on the basis of unlimited wants and

limited resources. Many economists like Fraser are of the view that Economics is something

more than a valuation theory.

7. Colorless:

Liking and disliking make a science interesting, charming and colorful. According to Robbins,

an economist must remain neutral and impartial. Hence he has made Economics impersonal,

abstract and colorless.

8. Lack of human touch:

Robbins is silent about human welfare. Hence human element is missing in his definition of

Economics.

9. Ignores ethics:

Robbins is of the view that Economics is not concerned with ethics. He gives same weightage to

all moral or immoral, legal or illegal activities. Souter says that:

“Robbins is a juggler with a static verbal logic.”

CONCLUSION

Despite of all these flaws, Robbins definition is considered the most persuasive and popular

definition of Economics. It is now universally accepted that scarcity of resources and unlimited

wants are the essence of Economics.

KEY TAKEAWAYS

 Economics is the study of how people allocate scarce resources for production, distribution,
and consumption, both individually and collectively.
 Two major types of economics are microeconomics, which focuses on the behavior of
individual consumers and producers, and macroeconomics, which examine overall
economies on a regional, national, or international scale.
 Economics is especially concerned with efficiency in production and exchange and uses
models and assumptions to understand how to create incentives and policies that will
maximize efficiency.