Introduction/Origin of Economics

The words ‘Economics’ has been derived from the Greek word “Okionomia” or
“Oeconomicus” by Greek philosopher Aristotle, which means management of the
household.
So, economics means managing household with limited fund resources, that is, how
people earn income and how they use it to fulfill their needs
Later on, it is extended to macro level including of society or country to all which gave
birth to the term economy. At, the conclusion economics is the social science that studies
the production, distribution, consumption and exchange of goods using available
resources.
According, to Adam smith, “ Economics is the science of wealth.’’
 Development of Economics/History
• Classified into three periods:-
1. Classical period (1776 AD- 1890 AD)
2. Neo- classical period (1890 AD-1932 AD)
3. Modern period (1932 onwards)
 Development of Economics/History
1. Classical period: Leader of Period Adam Smith.
(1776-1890) Other member in this period of David Ricardo, J.S Mills etc.
Adam Smith wrote book The Wealth of Nations
2. Neo Classical Period: Established new theory of economics.
(1890-1932) Adam smith wrote book ‘Principle of Economics
More other economist Fisher Sedgdwick, Edwin Cannan etc.
3. Modern Period ( 1932 onwards: Economics propounded in scientific way by famous
economist Lionel Robbins, John Keynes, Paul A. Samuelson etc. This economist
changed the era of Alfred Marshall by new innovating way.
Lionel Robbins wrote a book. ‘ An Essay on the Nature and Significance of Economic
Sciences’ and defined economics in terms of ‘ Scarcity and Choice’
Adam smith, “ Economics is the science of wealth .’’
 Wealth Definition (Classical Definition): Adam Smith
Q. Critically explain wealth definition of Economics- 8 marks

• The first definition of economics was given by Adam Smith, in 1776 A.D. a
citizenship of Scotland. Adam smith has separated economics from other social
science and defined economics for the first time. So, he is known as the father of
economics.
• Adam Smith has published his famous book entitled as "An Inquiry into the
Nature and Causes of Wealth of Nations" in 1776 A.D. This book is popularly
known as "Wealth of Nations". In the view of Adam, economics is the study of
activities of people in the production of wealth. The definition of economics given
by Adam Smith was supported by various classical economists like J.B Say, F.A
Walker, J.S Mill, etc.
 The wealth definition of economics has been further
explained using following properties (i.e. it has
following features):
1. Study of Wealth
According to the definition of Adam Smith, economics is only concerned with wealth earning activities. Every human living in
the society needs wealth to fulfill their basic requirements. All the human beings living in the society are concerned to earn
more and more wealth. It means economic deals with production, distribution, exchange and consumption of wealth.
2. Secondary Place to Mankind
The wealth centered definition of economic has given first priority to wealth and secondary priority to mankind. Adam Smith
assumed that mankind is for wealth but wealth cannot be for mankind.
3. Source of Wealth
According to the definition of Adam Smith, salary or wages earned by labourers is only the source to earn the wealth. Adam
Smith has suggested that the active labourers can earn high amount of wages through the division of labour. It increases
the productivity and distribution of the goods. In this way, a wealth of Nation can be increased.
4. Study of Economic-Man
Adam Smith claimed that economic studies the behavior of that person whose main objective is to earn more and more money
by hook or crook. Human of such nature, in the word of Adam Smith, is "Economic-man".
 Criticisms of Wealth Definition

The wealth definition of economics given by Adam Smith was strongly criticized on several grounds by a famous economist
like Carlyle, Ruskin, and Marshall. They criticized this definition by saying "Science of bread and butter“ means just to earn
more and how to be rich. However, the major criticisms of Adam Smiths definition are briefly explained below:
1. Narrow Definition
The wealth centered definition of economic has given stress on only those activities which are related to wealth earning
activities. This definition excludes those human beings who are not related to wealth earning activities. So, this definition
could not study the activity of those people who are engaged in social service. It justifies that wealth definition has a narrow
definition.
2. Over emphasis on Wealth
The wealth definition has over emphasized on wealth rather than human beings. Adam Smith extremely emphasized wealth by
giving primary importance to wealth and secondary importance to mankind. The critics pointed out that wealth is for human
beings but human beings are not for wealth. Therefore, human life cannot be sacrificed for wealth rather wealth should be
used for the betterment of mankind.
3. Single Source of wealth
Adam Smith said that wages earned by laborer are only one source of wealth of nation. But, the critics pointed out that the
natural resources, human resources, capital resources and physical resources are also the sources of wealth of nations. All
these resources together can be utilized to earn maximum wealth by the nation.
4. Unrealistic Concept of Economic-Man
Adam Smith assumed that every human being who wants to earn money by hook or crook is known as Economic-man. The
critics pointed out that almost all human beings have their own qualities of human life such as a feeling of life, experience,
self-esteem, respect, trust, etc. which provide greater satisfaction rather than wealth in their life. So, the pure economic man
does not exist in real life.
Q. Critically explain Marshallian definition of Economics/
Explain Welfare definition of economics. (VVI)

Many economists have realized that there are serious mistakes in Adam Smith's definition.
His definition of economics made man selfish. People started thinking about economics as a
science of getting rich etc. In order to save economics from this shiver criticism, Marshall,
the leader of neo-classical economists, gave a new concept about economics by publishing
his book,” Principles of economics” in 1890 A.D. Marshall enlarged the scope of economics
by shifting the emphasis from wealth to man. He said that people were not for wealth but
wealth was made for the people. The objective of economics is to increase human welfare.
Wealth is not the end but it is only the means. So, Marshall gave primary place to man and
secondary place to wealth. Many economists like A.C. Pigou, Cannon, and Beverage, etc.
have supported the view of Marshall. The main points or ideas in the definition of Marshall
are as follows:
 Features

1. Study of primary concern to mankind.

Economics is mainly concerned with the study of mankind in relation to wealth. Wealth is for the
benefit of mankind and first importance should be given to mankind and secondary importance to
wealth.
2. Study to an ordinary man.
According to Marshall, economics is related to the behavior of an ordinary man. Ordinary men are
those who are involved not only in accumulating more wealth but also try to experience love,
sympathy, goodwill, etc. to make their social life more meaningful.
3. Study of material welfare.
Economics does not study the hole of human welfare but only part of it called material welfare.
Material welfare means satisfaction derived from the consumption of physical goods. Any forms of
goods of economic value that provide satisfaction are regarded as the subject matter of economics.
Non-material welfare is outside the scope of economics.
4. Study of social science.
Marshall explains that economics studies those people who live in society. It does not study about
isolated people, not belonging to a society such as a sadhu, priests, beggar, monks, etc.
 Criticism of Welfare Definition of Economics
Alfred Marshall’s definition was quite popular until it was attacked by Lionel Robbins. In his book ‘An
essay on the nature and significance of economic science’, published in 1932 A.D. The definition of Marshall
has been strongly criticized by Robbins in the following points.
1. The definition is not analytical.
Alfred Marshall has divided human activities into economic and non economic, material and non-
material & ordinary and extra-ordinary. But he could not able to separate these terms clearly.
Therefore, his definition is only classificatory rather than analytical in nature.
2. Economics is human science not only social science.
According to Marshall, economics studies the economic activities of social man only. But in Robbins’s
view this idea is wrong. The man who lives outside the society may be engaged in economic activities.
Either the person lives in society or not, he has to face various economic problems. Hence, economics is
not only social science but it is a human science also.
3. Focus on material activities only.
According to Marshall, economics studies only material activities which are the base of happiness. An
ultimate goal of man is to increase material welfare. But in Robbins view, the non-material activities may
also promote human welfare. Because of the services provided by doctor, teacher, etc., there is possibility
of promotion of human welfare.
 Criticism
4. All material goods may not provide welfare:
According to Marshall, material goods provides welfare for person, but some of the goods like
cigarette, alcoholic drinks etc. are not able to promote welfare for the user. When harmful goods
are used, welfare can’t be achieved.
5. Difficult to separate material & non-material things.
Marshall includes only material things within the scope of economics and excludes all non-
material things. But it is quite difficult to separate material and non material things. For
example: – if a doctor services for fee, it is material and if he services for free, it is non-material.
Anyway, Marshall’s definition of economics as a material welfare remains popular for a long
time. It considered wealth as a means to satisfy the human needs. Thus, on the basis of entire
analysis, his definition of economics can be taken suitable one theoretically.
Q. Critically explain Robbins definition of Economics/
Explain scarcity/modern definition of economics. (VVI)
The modern economist Lionel Robbins has highly criticized Marshall’s definition
of economics. He gave the most scientific and logical definition of economics in his
book (An essay on the nature and significance of economic science) in 1932 A.D.
According to him, “Economics is the science which studies human behavior as a
relationship between ends and scares means which have alternative uses”. His
argument is that economics is concerned with the problems arising from scarcity.
People solve the problem of scarcity by allocating scarce resources to the best
possible use. Most of the man’s economic activities are moving around the problem
of scarcity and choice. This is the central idea in Robbins’s definition. 
 Characteristics Of Robbins Definition

1. Unlimited human wants or use.

According to Robbins’s, human wants are unlimited. These unlimited wants are not possible to satisfy at a
time. If one want is satisfied, another arises in our mind immediately. Thus there is a chain of wants, one
want chasing another. There are no ends of human needs.
2. Limited resources.
Human wants are unlimited but the means to satisfy them are limited relatively. The wants are more times
than means. We called such a resource as a limited whose supply is less than demand. Limited resources
mean time, money, wealth, etc.
3. Scarce resources have an alternative use.
Human wants are unlimited but the means to satisfy this wants are scare but the scare means have
alternative uses. For example, money can be used to buy food, a book or to go to the cinema.
4. All wants are not equally urgent.
According to Robbins’s, all wants are not equally urgent. They differ in urgency. Some wants are more
urgent than the other ones. So, more urgent wants need more immediate satisfaction and others can wait.
Current wants are more important than future wants. For example  – Medicine is more important than
cosmetics for a sick girl.
5. Problems of choice
Although human wants are unlimited, all the wants are not equally important or urgent. More important
wants have to be fulfilled immediately and less important wants have to be fulfilled immediately and less
important can be postponed. So, human beings make a choice of wants to derive maximum satisfaction. So,
according to Robbins’s, choice making is really an economic problem.
 Criticism

• Criticism of Robbin’s Definition of Economics

The definition of economics given by Robbins is analytical, logical and
scientific. Robbins’s definition is regarded as a superior definition to the rest
of all definition of economics because he has provided newness in his
definition. But several economists like Fraser, Samuelson, Wotton, etc have
strongly criticized in the following points.
1. Hidden concept of welfare.
2. Economics is not only a positive science.
3. Incomplete definition
4. Abundance may create economic problem/Unnecessary emphasis on
scarcity.
5. Similar to Marshal definition.
 TYPES OF GOODS
• Economic-----Free goods
• Normal--------Inferior goods
• Substitute-----Complementary goods
• Public------Private goods
• Giffen goods
 Features of Land
1. Free gift of nature
2. Differ in quality
3. Passive factor of production
4. Immobile factor
5. Land is indestructible
 Factors of Production – Labour
• Labour actually means any type of physical or mental exertion. In economic
terms, labour is the efforts exerted to produce any goods or services. It includes
all types of human efforts – physical exertion, mental exercise, use of intellect,
etc. done in exchange for an economic reward. Let us see the features of labour
as a factor of production.

1. Perishable in Nature
Labour is perishable in nature. This simply means that it has to storage capacity,
i.e. labour cannot be stored. If a worker does not turn up to work for one shift his
labour of that shift is lost completely. It cannot be stored and utilized the next
day. That labour is lost permanently. A laborer cannot store his labour to use at
another time. So we say labour as a factor of production is highly perishable.
 Meaning and Definitions of Capital:

• Capital is defined as “All those man-made goods which are used in

further production of wealth.” Thus, capital is a man-made resource
of production. Machinery, tools and equipment of all kinds, buildings,
railways and all means of transport and communication, raw
materials, etc., are included in capital.
• Capital has a number of related meanings in economics, finance and
accounting. In finance and accounting capital generally refers to
financial wealth especially that used to start a business.
 Features/ Characteristics of Capital
1. Capital is a Passive Factor:
It is a passive factor of production. This is so because it becomes ineffective
without co-operation of labour.
2. Capital is Man Made:
It is created by man. Its supply is increased or diminished by the efforts of man.
According to John Stuart Mill, capital is the “accumulated product of past
labour destined for the production of future wealth”, i.e., when human labour is
applied to natural resources, then capital items are generated.
3. Capital has High Mobility:
Amongst all the factors of production, capital has the highest mobility. The land
is immobile, labour has low mobility, whereas ‘capital’ has both ‘place mobility’
and ‘occupational mobility’.
4. Capital is Elastic:
Supply of capital is elastic and can be adjusted easily and quickly according to
demand. On the other hand, the supply of land is fixed and the supply of labour
can neither be increased nor decreased quickly.
5. Capital is Temporary in Nature:
Capital has to be reproduced and replenished from time to time.
6.  Capital is not a Gift of Nature:
Production of capital involves some cost as it is not a natural gift, and is not
freely available. It is earned with hard labour and sacrifice.
8. Capital is the Result of Past Savings:
In some cases when the consumption of capital good is not simultaneous
with the production, it becomes a saving, e.g., when a farmer does not
consume or sell a part of his crop production, it can be used as seeds in
the future.
 Organization or Entrepreneurship
• Entrepreneurship is the most important factor of production.
• It organizes other factor of production, brings together, organizes
and coordinates them and takes risks to earn profit. Therefore, the
organizers and risk bearers are known as entrepreneurs.
• There are different type of organization such as like sole trading,
partnership, joint stock company, multinational company etc.
 Features of Organization

1. Collection of people: An organization is established with help of people. To

achieve the goal and target of organization individual has different role to
accomplish tasks.
2. Structure: Structure means to divide individual of organization in basis of
division of work. Whole work is divided from top level to bottom level work to
the worker according to their capacity.
3. Technology: It refer to the technique used for transformation of inputs into
desired output. Technology may be used for better output for organization.
 Features of Organization
4. Environment : Good environment enhances the betterment of
organization to achieve the goal. Organization if it is affected by
external factors like political, economic, socio-cultural factors etc.
creates problem to work for individual.
5. Risk and Return: Every organization are established to earn profit
i.e. Return by bearing various degrees of risks.
 Thank you everyone!
See you tomorrow with the
new chapter…