Meaning of Economics

Economics is the study of how people allocate limited resources to satisfy their unlimited wants. It examines decision-making processes at individual, business, and societal levels to optimize resource use.

Two Major Factors Responsible for Economic Problems:

1. Unlimited Human Wants – People have endless desires for goods and services.
2. Scarcity of Resources – Natural and man-made resources are limited in supply.

Since resources are scarce, economics focuses on how to efficiently allocate them to fulfill human needs.

Concept of Economics: Want – Effort – Satisfaction

Economics revolves around the cycle of:

• Want – The need for goods and services.
• Effort – The work or production process required to fulfill these wants.
• Satisfaction – The fulfillment derived from consuming goods and services.

Origin of the Word ‘Economics’; The term ‘Economics’ is derived from the Greek word ‘Oikonomikos’, which is divided into:

• ‘Oikos’ – Meaning Home
• ‘Nomos’ – Meaning Management

Thus, Economics originally meant ‘Home Management’, referring to managing household resources efficiently. Over time, its scope expanded to include resource allocation in businesses, governments, and economies.

The various definitions of economics highlight the evolution of economic thought and how different economists have approached the subject. Let’s discuss each definition and analyze which one is the most comprehensive.

1. Wealth Definition (Adam Smith – 1776)

Adam Smith, known as the “Father of Economics,” defined economics as the study of wealth. His book “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) focused on how nations create and accumulate wealth. He emphasized:

• Production and accumulation of wealth.
• Division of labor as a key driver of economic growth.
• The role of markets and free trade in wealth generation.

Criticism:

• This definition gives primary importance to wealth, neglecting human welfare.
• It focuses only on material wealth, ignoring social and ethical aspects.
• Economics is not just about wealth creation but also its distribution and impact on society.

2. Welfare Definition (Alfred Marshall – 1890)

Marshall shifted the focus from wealth to human welfare in his book “Principles of Economics”. His definition emphasized:

• Economics as a study of “mankind in the ordinary business of life.”
• Both individual and social actions that promote economic welfare.
• A distinction between material things (goods that can be seen, felt, and touched) and immaterial things (skills, knowledge, etc.).

Criticism:

• The definition is too narrow, as it focuses only on material welfare.
• It ignores non-material aspects of life, such as psychological and environmental factors.
• The concept of “welfare” is subjective and difficult to measure.

3. Scarcity Definition (Lionel Robbins – 1932)

Robbins provided a scientific definition of economics in “An Essay on the Nature and Significance of Economic Science”. His key contributions include:

• Economics as a science of choice due to scarcity.
• The relationship between unlimited human wants and limited resources.
• The idea that scarce resources have alternative uses, and individuals must make rational choices.

Criticism:

• This definition ignores aspects of human welfare and social justice.
• It does not address macroeconomic issues like economic growth and development.
• It does not consider the role of government and policies in economic activities.

4. Growth Definition (Paul Samuelson)

Samuelson’s definition is broader and dynamic, as it includes:

• Scarcity and choice (like Robbins).
• Production, distribution, and consumption of goods and services.
• Economic growth and development over time.
• The role of money and resource allocation to ensure long-term sustainability.

Why Samuelson’s Definition is More Satisfactory?

• It incorporates both microeconomics (individual choices) and macroeconomics (economic growth and policies).
• It considers both present and future economic activities.
• It addresses scarcity, choice, production, and distribution, making it more comprehensive.
• It is dynamic, meaning it adapts to changing economic conditions.