Define the economics

1. General Definition of Economics:

The English word economics is derived from the ancient Greek word oikonomia—meaning the
management of a family or a household. It is thus clear that the subject economics was first studied in
ancient Greece.

What was the study of household management to Greek philosophers like Aristotle (384-322 BC) was the
“study of wealth” to the mercantilists in Europe between the sixteenth and eighteenth centuries.

Economics, as a study of wealth, received great support from the Father of economics, Adam Smith, in
the late eighteenth century. Since then, the subject has travelled a long and this Greek or Smithian
definition serves our purpose no longer. Over the passage of time, the focus of attention has been
changed. As a result, different definitions have evolved.

These definitions can conveniently be grouped into three:

(i) Smith’s Wealth definition;

(ii) Marshall’s Welfare definition; and

(iii) Robbins’ Scarcity definition.

2. Adam Smith’s Wealth Definition:

The formal definition of economics can be traced back to the days of Adam Smith (1723-90) — the great
Scottish economist. Following the mercantilist tradition, Adam Smith and his followers regarded
economics as a science of wealth which studies the process of production, consumption and accumulation
of wealth.

His emphasis on wealth as a subject-matter of economics is implicit in his great book— ‘An Inquiry into
the Nature and Causes of the Wealth of Nations or, more popularly known as ‘Wealth of Nations’—
published in 1776.

According to Smith:
“The great object of the Political Economy of every country is to increase the riches and power of
that country.” Like the mercantilists, he did not believe that the wealth of a nation lies in the
accumulation of precious metals like gold and silver. To him, wealth may be defined as those goods and
services which command value-in- exchange. Economics is concerned with the generation of the wealth
of nations. Economics is not to be concerned only with the production of wealth but also the distribution
of wealth. The manner in which production and distribution of wealth will take place in a market
economy is the Smithian ‘invisible hand’ mechanism or the ‘price system’. Anyway, economics is
regarded by Smith as the ‘science of wealth.’
Other contemporary writers also define economics as that part of knowledge which relates to wealth. John
Stuart Mill (1806-73) argued that economics is a science of production and distribution of wealth.
Another classical economist Nassau William Senior (1790-1864) argued “The subject-matter of the
Political Economics is not Happiness but Wealth.” Thus, economics is the science of wealth. However,
the last decade of the nineteenth century saw a scathing attack on the Smithian definition and in its place
another school of thought emerged under the leadership of an English economist, Alfred Marshall (1842-
1924).
Criticisms:
Following are the main criticisms of the classical definition:
i. This definition is too narrow as it does not consider the major problems faced by a society or an
individual. Smith’s definition is based primarily on the assumption of an ‘economic man’ who is
concerned with wealth-hunting. That is why critics condemned economics as ‘the bread-and-butter
science’.

ii. Literary figures and social reformers branded economics as a ‘dismal science’, ‘the Gospel of
Mammon’ since Smithian definition led us to emphasise on the material aspect of human life, i.e.,
generation of wealth. On the other hand, it ignored the non-material aspect of human life. Above all, as a
science of wealth, it taught selfishness and love for money. John Ruskin (1819-1900) called economics a
‘bastard science.’ Smithian definition is bereft of changing reality.

iii. The central focus of economics should be on scarcity and choice. Since scarcity is the fundamental
economic problem of any society, choice is unavoidable. Adam Smith ignored this simple but essential
aspect of any economic system.

3. Marshall’s Welfare Definition:

Alfred Marshall in his book ‘Principles of Economics published in 1890 placed emphasis on human
activities or human welfare rather than on wealth. Marshall defines economics as “a study of men as they
live and move and think in the ordinary business of life.” He argued that economics, on one side, is a
study of wealth and, on the other, is a study of man.

Emphasis on human welfare is evident in Marshall’s own words: “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.”

Thus, “Economics is on the one side a study of wealth; and on the other and more important side, a part of
the study of man.” According to Marshall, wealth is not an end in itself as was thought by classical
authors; it is a means to an end—the end of human welfare.

This Marshallian definition has the following important features:

i. Economics is a social science since it studies the actions of human beings.

ii. Economics studies the ‘ordinary business of life’ since it takes into account the money-earning and
money-spending activities of man.

iii. Economics studies only the ‘material’ part of human welfare which is measurable in terms of the
measuring rod of money. It neglects other activities of human welfare not quantifiable in terms of money.
In this connection A. C. Pigou’s (1877- 1959)—another great neo-classical economist—definition is
worth remembering. Economics is “that part of social welfare that can be brought directly or indirectly
into relation with the measuring rod of money.”

iv. Economics is not concerned with “the nature and causes of the Wealth of Nations.” Welfare of
mankind, rather than the acquisition of wealth, is the object of primary importance.

Criticisms:
Though Marshall’s definition of economics was hailed as a revolutionary one, it was criticised on several
grounds.

They are:
i. Marshall’s notion of ‘material welfare’ came in for sharp criticism at the hands of Lionel Robbins (later
Lord) (1898- 1984) in 1932. Robbins argued that economics should encompass ‘non- material welfare’
also. In Teal life, it is difficult to segregate material welfare from non-material welfare. If only the
‘materialist’ definition is accepted, the scope and subject-matter of economics would be narrower, or a
great part of economic life of man would remain outside the domain of economics.

ii. Robbins argued that Marshall could not establish a link between economic activities of human beings
and human welfare. There are various economic activities that are detrimental to human welfare. The
production of war materials, wine, etc., are economic activities but do not promote welfare of any society.
These economic activities are included in the subject-matter of economics.

iii. Marshall’s definition aimed at measuring human welfare in terms of money. But ‘welfare’ is not
amenable to measurement, since ‘welfare’ is an abstract, subjective concept. Truly speaking, money can
never be a measure of welfare.

iv. Marshall’s ‘welfare definition’ gives economics a normative character. A normative science must pass
on value judgments. It must pronounce whether a particular economic activity is good or bad. But
economics, according to Robbins, must be free from making value judgment. Ethics should make value
judgments. Economics is a positive science and not a normative science.

v. Finally, Marshall’s definition ignores the fundamental problem of scarcity of any economy. It was
Robbins who gave a scarcity definition of economics. Robbins defined economics in terms of allocation
of scarce resources to satisfy unlimited human wants.

4. Robbins’ Scarcity Definition:

The most accepted definition of economics was given by Lord Robbins in 1932 in his book ‘An Essay on
the Nature and Significance of Economic Science. 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 the science which studies human behaviour as a relationship between ends and scarce
means which have alternative uses.”

From this definition, one can build up the following propositions:

(i) Human wants are unlimited; wants multiply—luxuries become necessities. There is no end of wants. If
food were plentiful, if there were enough capital in business, if there were abundant money and time—
there would not have been any scope for studying economics. Had there been no wants there would not
have been any human activity. Prehistoric people had wants. Modern people also have wants. Only wants
change—and they are limitless.

(ii) The means or the resources to satisfy wants are scarce in relation to their demands. Had resources
been plentiful, there would not have been any economic problems. Thus, scarcity of resources is the
fundamental economic problem to any society. Even an affluent society experiences resource scarcity.
Scarcity of resources gives rise to many ‘choice’ problems.
(iii) Since the prehistoric days one notices constant effort of satisfying human wants through the scarcest
resources which have alternative uses. Land is scarce in relation to demand. However, this land may be
put to different alternative uses.

A particular plot of land can be either used for jute cultivation or steel production. If it is used for steel
production, the country will have to sacrifice the production of jute. So, resources are to be allocated in
such a manner that the immediate wants are fulfilled. Thus, the problem of scarcity of resources gives rise
to the problem of choice.

Society will have to decide which wants are to be satisfied immediately and which wants are to be
postponed for the time being. This is the choice problem of an economy. Scarcity and choice go hand in
hand in each and every economy: “It exists in one-man community of Robinson Crusoe, in the patriarchal
tribe of Central Africa, in medieval and feudalist Europe, in modern capitalist America and in Communist
Russia.”

In view of this, it is said that economics is fundamentally a study of scarcity and of the problems to which
scarcity gives rise. Thus, the central focus of economics is on opportunity cost and optimisation. This
scarcity definition of economics has widened the scope of the subject. Putting aside the question of value
judgement, Robbins made economics a positive science. By locating the basic problems of economics —
the problems of scarcity and choice — Robbins brought economics nearer to science. No wonder, this
definition has attracted a large number of people into Robbins’ camp.
The American Nobel Prize winner in Economics in 1970, Paul Samuelson, observes: “Economics is the
study of how men and society choose, with or without the use of money, to employ scarce productive
resources which could have alternative uses, to produce various commodities over time, and distribute
them for consumption, now and in the near future, among various people and groups in society.”

Criticisms:
This does not mean that Robbins’ scarcity definition is fault free.

His definition may be criticized on the following grounds:

i. In his bid to raise economics to the status of a positive science, Robbins deliberately downplayed the
importance of economics as a social science. Being a social science, economics must study social
relations. His definition places too much emphasis on ‘individual’ choice. Scarcity problem, in the
ultimate analysis, is the social problem—rather an individual problem. Social problems give rise to social
choice. Robbins could not explain social problems as well as social choice.

ii. According to Robbins, the root of all economic problems is the scarcity of resources, without having
any human touch. Setting aside the question of human welfare, Robbins committed a grave error.

iii. Robbins made economics neutral between ends. But economists cannot remain neutral between ends.
They must prescribe policies and make value judgments as to what is good for the society and what is
bad. So, economics should pronounce both positive and normative statements.

iv. Economics, at the hands of Robbins, turned to be a mere price theory or microeconomic theory. But
other important aspects of economics like national income and employment, banking system, taxation
system, etc., had been ignored by Robbins.

Conclusion:
The science of political economy is growing and its area can never be rigid. In other words, the definition
must not be inflexible. Because of modern research, many new areas of economics are being explored.

That is why the controversy relating to the definition of economics remains and will remain so in the
future. It is very difficult to spell out a logically concise definition. In this connection, Mrs. Barbara
Wotton’s remarks may be noted – ‘Whenever there are six economists, there are seven opinions!’

Despite these, Cairncross’ definition of economics may serve our purpose:

“Economics is a social science studying how people attempt to accommodate scarcity to their wants and
how these attempts interact through exchange.” By linking ‘exchange’ with ‘scarcity’, Prof. A. C.
Cairncross has added another cap to economics.

However, this definition does not claim any originality since scarcity—the root of all economic problems
—had been dealt with elegantly by Robbins.

That is why, Robbinsian definition is more popular:

Economics is the science of making choices. Modern economics is a science of rational choice or
decision-making under conditions of scarcity.

The Basic Economic Problem

"Economics is the study of the division of scarce resources between unlimited needs and wants"
Let us explain further. You are the head of your household. There are several things which are needed to keep
the household running, e.g. food, electricity, gas and so forth. There are also wants, which may not have to be
fulfilled per se, but will be acquired somehow.
A store manager has a limited budget to spend on various wants, his resources are scarce. He could spend his
money on providing more staff, bringing in more stock from a wholesaler, marketing his product to increase
demand through advertising, decorating or improving his store and paying for essential services like water and
electricity. Effectively he has unlimited wants but limited means or resources. We say that his resources
are scarce. The store manager must economise by choosing to use his resources to satisfy certain wants such as
marketing instead of others like stock purchase. As earlier stated, economics is the study of the division of
these resources to best satisfy the unlimited wants.
Every economy in the world face three main basic economics problems because the needs and wants of the
society are unlimited but the resources available to satisfy those are limited. Whether a country is rich or poor
this is a common situation to all of them. The main economics problem are:

1. What to produce in which quantities?

2. How to Produce?
3. For whom to produce?

What to produce 
In any society there are unlimited wants but resources are limited or resources are scarce. And these resources
have alternative uses. Due to this each society has to decide what they are to produce using these scarce
resources. So each economy has to make choice by thinking what kind of products or what quantity is to be
produced. For example a economy has to decide whether to produce more services such as transport or
hospitals, or consumable goods like more clothes and houses or more capital goods such as roads, buildings
etc. The economy must decide which goods and services to produce and which goods and services to exclude
from production is the problem of choice between commodities

How to produce?
The problem of ‘how to produce’ means which combination of resources is to be used for the production-of
goods and which technology is to be made use of in production. Once the society has decided what goods and
services are to be produced and in what quantities, it must then decide how these goods shall be produced.
There are various alternative methods of producing a good and the economy has to choose among them. For
example, cloth can be produced either with automatic looms or with power looms or with handlooms. Fields
can be irrigated (and hence wheat can be produced) by building small irrigation works like tube-wells and
tanks or by building large canals and dams. Therefore, the economy has to decide whether cloth is to be
produced by handlooms or power looms or automatic looms. Similarly, it has to decide if the irrigation has to
be done by minor irrigation works or by major works. So obviously, it is a problem of the choice of
production.

For whom to produce?

Once an economy has produced goods and services, it also has to decide who will consume those goods. This
will be decided by different way by the nature of the economy.
Though the above three problem are common to each economy, an economy can take different approaches to
solve these basic economics problems, and depending on the approach economies are organized in different
way. This is why we find different economies such as market economy, centrally planned economy and mixed
economy and so for