Economics: An Overview

The word ‘Economics’ originates from the Greek work ‘Oikonomikos’ which can be divided into two parts:
(a) ‘Oikos’, which means ‘House’, and (b) ‘Nomos’, which means ‘Management’.

Economics: Study of an economic system in all its aspects - structure, working, performance, problems, and their solutions.

The meaning of the term, “study of an economy” includes: (a) Alternative forms of an economy like capitalism, socialism and a mixed economy. (b) Economic decisions and their implementation by – Individual economic units like individuals, households and business units – Groups of economic units, institutions – Public Authorities (c) Interrelationships between economic units and their groups. (d) The performance of individual economic units, their groups, and the economy as a whole. (e) Interrelationship between different economies.

Economic system is based on economic wants and non economic wants.

Economic wants have several characteristics but the  most significant are only two of them: – 
a. Even if satisfied, the wants have a tendency to re-emerge.
b. With the passage of time, the wants tend to increase in number and in variety

This is because
1.The “means” available for satisfaction are insufficient or limited in comparison with the wants to be satisfied. The means of resources do not increase rapidly enough to match the growing requirement of human wants.

2.This mismatch between the available resources and economic wants becomes a permanent problem for individual economic units and the society as a whole.

3. As a result, every society and its component economic units, adopt a twofold course of action,
namely, the following: – to increase the availability of resources by their own efforts. – to maximize the use of available resources in best possible economical manner.
This includes to make best allocation of these resources in alternative uses
i.e., to use these resources for satisfying the most pressing wants to the exclusion of the less pressing ones.

4.Accordingly, the society creates a set of institutions like those of money and credit, markets,
a system of sales and purchase, system of facilities relating to production,
transport, storage etc. to arrive close to solutions.

Stages as Economics developed as a subject:
1. Wealth Definition
2. Material Welfare Definition
3. Scarcity and Choice Definition
4. Development and Growth Definition

ADAM SMITH - Enquiry into the Nature and Cause of the Wealth of Nations, 1776
Central point in his definition - wealth creation
Characteristics of Wealth Definition:
(i) Exaggerated Emphasis on Wealth:
These wealth centred definitions gave too much importance to the creation of wealth in an economy.
The classical economists believed that economic prosperity of any nation depends only on the accumulation of wealth.
(ii) Inquiry into the Creation of Wealth:
These definitions show that economics also deals with an inquiry into the causes behind the creation of wealth.
(iii) A Study on the Nature of Wealth

Advantages:
(a) Adam  Smith  was  primarily  concerned  with the  question  of  creation  of  wealth,  that  is,  the means  of consumption and the capacity to produce such means.
In this sense, he was justified in defining economics as  a  science  of  wealth,  which  highlighted  the  need  for  an  economy  to  acquire  capacity  to  produce more.
(b) During Smith’s days, most economies including that of Britain
were so poor that the problem of income inequalities did not attract sufficient attention.
Therefore, Adam Smith also chose to ignore this problem.

Disadvantages:
(a) Wealth concept of economics was bitterly criticized,
because it assumed wealth as an end of human activities.
Critics of the wealth definition of economics are unhappy about the fact that it accords primary place to ‘wealth’ to the neglect of the welfare aspects of man. It is maintained that after all,
an economy is meant to serve the society and its members rather than the other way round.

(b) Though Adam Smith could ignore the problem of distributive justice
that is the problem of inequalities of income and wealth because of the underdevelopment of the economy during his days,
it could not be avoided for long, particularly because the fruits of economic growth and riches
were not reaching the masses. With  growing  national income, the  rich were  becoming  richer  and the  poor were  becoming poorer.

(c) Adam Smith’s definition of economics in terms of wealth was also criticized
by philosophers and social thinkers for ignoring the ‘higher’ values of life
and reducing it to a ‘dismal science’.
According to them, if this definition is accepted in life,
there will be no place for love, affection, sympathy and patriotism.
Absence of these values altogether was also not justified.

(d) The concept of wealth as given by Adam was also rejected on the grounds
that what matters is not just the production and consumption of tangible goods,
but services matter equally. The relevance of services can be judged by this fact that provision of certain services
is essential even for the maintenance and addition to the productive capacity of the economy.
Examples can be given of education, health, medical care etc.
Even defence, law and order, efficient systems of administration and justice also add to the security and working capacity of the society adding to its riches.

A. MARSHALL - ECONOMICS AS A SCIENCE OF MATERIAL WELFARE 
 “Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man”.

Characteristics:

1. Study of Material Requisites of Well Being 
2. Concentrates on the ordinary business of life 
3. Stress on the role of man

Advantages:
Welfare definitions of economic are more relevant, comprehensive and scientific than wealth definitions. Transforming economics as a science of human welfare from a science of wealth.

Disadvantages:
a. It is not possible to define the concept of welfare in a precise manner. It has not been found how to measure  economic  welfare accurately  and  in  a universally  acceptable manner.
b. Economics studies even those activities which are not expected to add to economic welfare
of the society.
c. Economics is study the production and consumption of goods and services which collectively affect our welfare. Therefore, it is inappropriate to restrict economics
to the study of only tangible or material goods.
d. Criticized by the pioneers of Scarcity Concept.

L. ROBBINS - SCARCITY ECONOMICS
“An Essay on the Nature and Significance of Economic Science”. 1932

 ‘‘Economics is the science, which studies human behaviours as a relationship between ends and scarce means which have alternative uses.’’

- The ends or wants of an economy are unlimited in number and variety,
and they keep increasing with the passage of time.
– An economy always has shortage of resources compared with to the wants to be satisfied.
– It is possible to select between several alternative resources for satisfying a given want.
– Man has therefore, to choose between wants.
– Similarly, it is possible to use a given resource for the satisfaction of several alternative wants.

Characteristics
Robbins maintains that if we define economics with an emphasis on its welfare aspects, we will have to judge the existing performance of the economy and suggest possible improvement
in its structure and working. Such a use of economics for “normative purposes”,
that is, for drawing policy inferences, necessitates that the society should have a widely accepted set of goals.

Robbins believes that, as economists, we should not go into the question of policy inferences.
This task should be left to other disciplines. Economists should only study economics in terms of “what is” and not what “ought to be”

Advantages:

1. Study of human behaviour
2. Analytical
3. Wider scope 
4. Universal 
5. More Logical Explanation of Economic Power 

Disadvantages:

1. since it is possible to use knowledge of economics in an attempt to curing the ills of the economy, there is no justification in adopting an attitude of indifference towards the problems of unemployment, poverty, inflation, regional disparities, and low rate of economic growth. A better course would be to use our knowledge of economics in devising policies for achieving maximum possible economic welfare with minimum possible resource cost and human labour.
2. The shortage of “merit goods” provides a very strong argument in hands of the critics of scarcity approach. Merit goods are those goods, the consumption of which benefits not only the consumers, but also the non-consumer. Generally, the cost of production of such goods is high and a large section of the population is not able to pay their market determined prices. Therefore, left to the market forces, their supplies tend to be insufficient. Obviously, the authorities should step in with measures to supplement their supplies and make them available to the society at affordable prices.
3. the existence of several public services (like defence, law and justice, etc.) which cannot be provided by the market. It is not possible to sell them and recover production costs. Only the authorities can provide them by incurring expenditure out of their budgetary resources.
4. Robbins has made economics quite impersonal and colourless. By making it a complete positive science and excluding normative aspects he has narrowed down its scope.
5. His definition does not  cover the theory of economic growth and development. While Robbins takes resources as given and talks about their allocation, it is totally silent about the measures to be taken to raise these resources i.e. national income and wealth.
6. Robbins assumed rationality on the part of economic units in their behaviour. But in real life situation, a man is influenced more by customs and habits than by rational outlook.

SAMUELSON - SCARCITY AND EFFICIENCY - DEVELOPMENT AND GROWTH DEFINITION

“Economics is the study of how people and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses to produce various commodities over time and distributing them for consumption, now or in the future, among various persons or groups in society. It analyses costs and benefits of improving patterns of resource allocation”.

Economics: An Introductory Analysis, 1948

Characteristics:

1. Growth-orientation 
2. Dynamic Allocation of Consumption 
3. Distribution 
4. Improvement of Resource Allocation 

Economics carries both the attributes of a science as well as an art.

Scope of Economics

1. Macroeconomics

2. Microeconomics

3. International Economics

4. Public Finance 

5. Development Economics 

6. Health Economics 

7. Environmental Economics 

8. Urban and Rural Economics 

Central Problems of an Economy

1. What to produce?

2. How to produce?

3. For whom to produce?

Samuelson used the production possibility curve to help answer these questions - essentially the locus of all such combinations of two commodities which can be produced in a country given its available resources and technology.

Opportunity cost: Opportunity cost is the value of alternative foregone in order to have something else. This value is unique for each  individual. 

A country will decide how best to allocate its resources based on its opportunity cost.

Economic System: An entire set of arrangements and institutions meant for meeting the two-fold objectives of a society, namely:

• increasing the availability of resources 
• ensuring economic use of the same 

There are 3 different types of economic system:

1. Capitalistic
2. Socialistic
3. Mixed

CAPITALIST SYSTEM:

Characterised by free markets and the absence of government intervention in the economy. In practise, however, some amount of government intervention is required. Means of production aren't owned by the government or cooperatives, but privately. People gain motivation to earn more as they can keep what they earn. However, it also leads to increasing inequalities. And while it's theoretically assumed that market structure of a capitalist economy is competitive in nature, that's not necessarily true. 

Due to the complex nature of a capitalist society, money and credit are required to facilitate it. 

Merits

1. Self regulatory
2. Faster economic growth 
3. Forces of demand and supply determine production. 
4. Flexibility 
5. Individual freedom to entrepreneurs 

Demerits

1. Inequalities of income, wealth and opportunity 
2. Distortion in production pattern
3. Production of merit goods isn't profitable 
4. Over-emphasis on profit 
5. Loss of human values and welfare 
6. Competition results in increased wastage of resources 

SOCIALIST ECONOMY

The concept of a socialist economy has its origin in the drawbacks of capitalism.

 “Socialism is an organisation of the society in which the material means of production are owned by the whole commodity and operated 

by organs, representative of and responsible to, all members of community 

according to a general plan, all members of community being entitled to get benefits from the results of such socialist planned production on the basis of equal rights.” - H.D. Dickinson.

Characteristics:

1. Abolition of private property and inheritance 
2. No free market 
3. Restricted use of money and credit 
4. Classless society 

Merits:

1. Distributive justice
2. social security 
3. elimination of economic fluctuations 
4. coordinated development 
5. elimination of social disputes 

Demerits:

1. Unable to provide economic incentives and disincentives re: hard work and initiative 
2. Slow growth rate 
3. Poor labour productivity 
4. Low per capita income 

MIXED ECONOMY

A mixed economy tries to

– avoid the ill-effects of both capitalism and socialism

– secure the benefits of both.

For this  reason,  it incorporates  some elements of both  capitalism and socialism. However, there  is no predetermined

and standardised proportion in which their features could be selected and combined.

Economic cycles: economy-wide fluctuations in production or economic activity such as income employment, savings and investment over several months or years. These fluctuations

occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession or depression).

Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern.