Lecture 1 definitions and scope


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Lecture 1 definitions and scope

  1. 1. Lecture 1Nature of Economics Definitions
  2. 2. Difficult to Define• Economists like Pareto, Myrdal and Hutchinson think that any search for a precise definition of Economics is a barren enterprise• Many economists thought it is needless to waste words in defining Economics• However, it is essential for a student to have some definition in mind as working basis
  3. 3. Early Definitions• According to Adam Smith – Economics is concerned with an enquiry into nature and causes of wealth• Craines in his book said – Economics deal with the phenomenon of wealth• According to a French economist J.B. Say – Economics is science which treats of wealth• The American Economist, F.A Walker is of the view that – Economics is that body of knowledge which relates to wealth• In all these definitions, key position is assigned to WEALTH
  4. 4. Problem with Early Definitions• Too much emphasis on wealth• This led to development of view that Economics teaches selfishness and came to be called a “dismal science”• S.Baliey in 1835 discussed the popular view of Economics as: – The unworthiness of political economy in public opinion stemmed directly from its explicit preoccupation with so degrading a subject-matter as wealth• Thus, all the vices attributed to wealth became attached to the science of wealth (i.e Economics)
  5. 5. Change in Definition• In the last quarter of the 19th Century humanistic character of Economics had come to be well recognized• Schaffle in Germany and Droz in France placed the role of man in Economics higher than that of wealth• It is now fully recognized that wealth is only a means to an end, the end being human welfare
  6. 6. Marshallian Definition• Marshal said – 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
  7. 7. Study of Marshall’s Definition• Marshall’s definition puts emphasizes on four points: – Economics does not regard wealth as the be-all and end- all of economic activities – Economics is not concerned with ‘economic man’ but is concerned with an ‘ordinary man’ – Economics is a social science and not one which studies isolated individuals – Economics studies only ‘material requisites of well- being’ or causes of material welfare
  8. 8. Criticism on Marshallian View• Lionel Robbins criticized Marshall’s definition on following grounds: – It is not right that an economists confine their attention to the study of material welfare • because in the actual study of economic principles, both the ‘material’ and non-material things – Marshall’s definition is classificatory • because it makes a distinction between material welfare and non- material welfare – It unduly restricted the scope of Economics • All those sums which are paid for ‘immaterial’ services e.g. services of doctors or lawyers etc. Contd…
  9. 9. Criticism on Marshallian View– Welfare is too vague and indefinite an idea to provide a sound foundation for building up a respectable science • e.g intoxicants are regarded as wealth but cannot be regarded as good for human welfare • Idea of welfare vary from age to age, country to country and from individual to individual– In assessing welfare, a verdict is needed that what is conductive to human welfare and what is not • This would led us to world of ethics where as Economics is neutral– According to Marshall, Economics deals with persons living in society. It ignores all others who also may have an economic problem • i.e. of using scarce means for the satisfaction of unlimited ends
  10. 10. Robbins, Definition• Robbins defined Economics as – Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses
  11. 11. Study of Robbins’ Definition• Robbins’ definition lays down the following three fundamental propositions which constitute basis of the structure of economic science – “Ends” refer to wants. Human beings have wants which are unlimited in number – Wants are unlimited but the means to satisfy them are strictly limited – Scarce means are capable of alternative uses• Thus, in Robbins’ sense, economic activity lies in man’s utilization of scarce means having alternative uses, for the satisfaction of multiple ends
  12. 12. Superiority of Robbins’ Definition• Robbins claimed that his definition is superior to earlier definition because – Independent of classification of material and non- material wants – Takes into account all kinds of wants – Elevation of economics to a science – No longer function of economics to judge right or wrong economic activity – It transcends the narrow boundaries within which the materialist definition confined Economics – Economics to be no longer called “dismal science”• Thus, the Robbins’ definition is superior both to the early definition (science of wealth) and Marshall’s definition (science of material welfare)
  13. 13. Criticism on Robbins’ Definition• Robbins’ definition attracted following criticism – Robbins reduced economics to only valuation theory. • Other aspects of the study of economics have been relegated to the background e.g aggregates – Individual choices having no social implications cannot form the basis of subject-matter of Economics – Economic growth and economic development has not been covered by Robbins’ definition – This definition does not explain problem of unemployment – Human touch is entirely missing – Robbins has made Economics more abstract and complex and hence difficult and fruitful
  14. 14. Modern Definitions• The credit of bringing about a revolution in economic thinking goes to Lord J.M. Keynes. According to him – Economics studies how the levels of income and employment in a community are determined• Thus, in Keynesian terms, Economics is defined as – The study of the administration of scarce resources and of the determinants of income and employment• In Benham’s words – Economics is a study of factors affecting the size, distribution and stability of a country’s national income
  15. 15. Conclusion Regarding Definition• There is no short definition of growing science like Economics would serve the purpose• One may agree with Prof. Viner that – Economics is what economists do – Economists do resource allocation or resource utilisation. They study size, distribution and stability of national income and economic growth• In short, Economics may be defined as – A social science concerned with the proper uses and allocation of resources for the achievement and maintenance of growth with stability• Prof. Henry Smith defined Economics as – Study of how in a civilized society one obtains the share of what other people have produced and of how the total product of society changes and is determined
  16. 16. Major Economic Problems• What is an economic problem? – In view of the scarcity of means at our disposal and the multiplicity of ends we seek to achieve – The economic problem lies in making the best possible use of our resources so as to get maximum satisfaction in case of a consumer and maximum output or profit for a producer
  17. 17. Fundamental Problems• What to produce? – Quantity and range of goods to produce – Resources are limited, we must choose between different alternative collection of goods and services that may be produced• How to produce? – Techniques of production e.g labor intensive, capital intensive• For whom to produce? – It means that how the national product is distributed i.e. who should get how much• Are the resources economically used? – No wastage ro misutilization of resources since they are limited• Problem to full employment? – Economy must endeavor to achieve full employment not only of labor but of all its resources• Problem of growth? – Economy must expand or develop to maintain conditions of stability
  18. 18. Nature of Economics Scope and Method
  19. 19. Two Main Streams• The study of Economics is divided into two parts on the basis of looking the system as whole or in terms of its innumerable decision- making units – Micro Economics • It is also called Price Theory – Macro Economics • It is also called Income Theory
  20. 20. Micro Economics• The word ‘micro’ means a millionth part• In ‘micro economics’ we analyze small part or component of the whole economy – e.g. individual consumer’s behaviour or firm, price of particular product or factor of production, employment in firm or industry• In simple, micro-economic theory studies the behaiour of individual decision making units such as consumers, resource owners and business firms• The basic assumption in micro economic analysis is full employment in the economy as whole
  21. 21. Importance of Micro-economics• It tells us how millions of consumers and producers take decisions about the allocation of productive resources among millions of goods and services• It explains how through market mechanism goods and services produced in the community are distributed• It also explains the determination of the relative prices of the various products and productive services• It explains the conditions of efficiency both in consumption and production and departure from the optimum• Micro-economics helps in the foumulation of economic policies calculated to promote efficiency in production and the welfare of the masses
  22. 22. Limitation of Micro-economics• It cannot give an idea of functioning of economy as a whole – An individual industry may be flourishing but economy as a whole may be languishing• It assumes full employment which is a rare phenomenon in the capitalist world – Therefore an unrealistic assumption
  23. 23. Macro-economics• Macro economics is concerned with aggregates and averages of the entire economy – E.g national income, aggregate output, total employment, total consumption, savings and investment, aggregate demand, aggregate supply, general level of prices etc.• In macro-economics, we study how these aggregates and averages of the economy as a whole are determined and what causes fluctuations in them•• Macro-economics also analyses the chief determinants of economic development and the various stages and processes of economic growth
  24. 24. Importance of Macro-economics• It is helpful in understanding and functioning of a complicated economic system – It gives bird’s eye view of the economic world• It is useful in framing economic policies for the nation• Macro-analysis also occupy an important place in economic theory in its pursuit of the solution of urgent economic problems – These problem relate to aggregate output, employment and national income
  25. 25. Limitations of Macro-economics• Individual is ignored – It is individual welfare which is the main aim of Economics• The macro-analysis overlooks individual differences – e.g. general price level may be stable but the prices of food grains may have gone spelling ruin to the poor
  26. 26. Integration of Macro and Micro-economics• Neither the two approaches (micro and macro) can alone adequately help us in analysing the working of the economic system• It is, therefore, essential to integrate two approaches• Ignoring one and exclusively concentrating attention on the other may often lead not only inadequate or wrong explanation but also to inappropriate or even disastrous remedial measures
  27. 27. Is Economics Science or Art?• By science we merely understand a systematized body of knowledge. – It is not merely collection of facts but the facts so arranged that they speak for themselves. – That is how laws are discovered which explain and elucidate the facts. – When laws are formulated then a branch of knowledge become a science• Judged by this standard, Economics is certainly science. – The economist collects the facts, facts have been carefully analyzed and put under suitable classification, and general principles governing these facts have been discovered and enunciated• Economics is not only science but also an art – It is a science in its methodology and an art in its application
  28. 28. Positive or Normative Science• Whether Economics is Positive Science or Normative Science? – Positive science explains WHAT IS – Normative science explains WHAT OUGHT TO BE i.e right or wrong of a thing – In simple words, positive science ‘describes’ while normative science ‘evaluates’• Some early economists, like J S Mill, Robbins, Craines; were of the view that Economics is just a positive science• However, Cairnes and Macfie talked about normative character of Economics
  29. 29. Can Economics Solve Practical Problems?• Kenyes said – The theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. – It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions
  30. 30. Limitations of Economics• Economics cannot predict the future events since its laws lack definiteness• No magic formula by which schemes of social betterment can be tested nor a sovereign remedy to economic ills• It is not business of the economist as such to decided whether large armaments are necessary or not
  31. 31. Laws of Economics• Like every other science, Economics, too has drawn its own set of generalizations, which are called laws of Economics• The nature of economics law is not indicated by the word – “must”, as in the case of statute law, or – by “ought” as in the case moral law; – But their nature is indicated by phrase “other things being equal”• Economics laws lacks definiteness and exactitude• Economics laws are said to be hypothetical or conditional since their validity depends on fulfillment of certain conditions• Economic laws are inevitable and inescapable if some necessary conditions are fulfilled – But these conditions are not always fulfilled – Therefore, economic laws lack predictability
  32. 32. Basic Assumptions in Economics• There are three broad assumptions – Behaviour of individuals • i.e. they behave in a rational manner – Consumer needs maximum satisfaction, labour purse for higher wages and entrepreneur seeks maximum profits • It is called maximization principle – Consumers tastes remain unchanged for fairly long periods of time – There is a perfect competition in the economy
  33. 33. Methods of Economics• Like other sciences Economics also uses scientific methods. These methods are: – Deductive Method – Inductive Method – Proper Method
  34. 34. Deductive Method• Economists of Classical School tried to build up the science of Economics from few simple generalizations – e.g. self-interest alone guides men in their daily life and they try to explain and predict all human behavior in terms of self interest• Classical economists by and large supported this method• Merits of Deductive Method – Useful in analyzing complex economic phenomenon – This method yields exact and true conclusions • Provided the premises on which they are based are true – It is very simple and easy of application – When data is not available or inadequate then this method is useful for drawing inferences• Limitations of Deductive Method – There is a big ‘IF’ in applying deductive method • i.e. if those assumptions are correct – This method made Economics dogmatic – This method is dangerous when universal validity is claimed for generalizations based on imperfect or incorrect assumptions
  35. 35. Inductive Method• Historic school represents reaction against the dogmatic attitude of followers of deductive method• This method insists on the examination of facts and then laying down general principles – Here we go from “particulars” to “generals”• Merits – This method can be applied for the verification of conclusions based on deductive reasoning – Economic phenomenon is too complex for deductive reasoning. It is better to use inductive method – This method is more suitable and useful in the formulations of economics policies• Limitations – This method dangerous when hurried conclusions are drawn on insufficient number of facts
  36. 36. Proper Method• The modern economist does not rely on one method. He uses both. It is said – “Induction and Deduction are both needed for scientific thought as the right and left foot are both needed for walking”• The deductive method seems to be more suitable in the field of pure theory and inductive method for formulating practical policies
  37. 37. Thank You