Chapter - I: Introduction

Part I: Nature and Methodology of Economics

1. Defining Economics Before beginning with the study in economics, it should be explained what is economic. In concrete following questions should be answered:
What is Economics, i.e., what is the definition of economics? Before discussing definitions given by renowned and classic economist like Adam Smith (1776),

Ricardo (1817), Robinson, etc we shall begin with the view Lord J.M Keynes. According to his view, Political Economy is said to have strangled itself with definitions. There are economists, like Richard Jones and Comte, who proposed to keep the question of definition of economy aside. Economists like Pareto, Myrdal and Hutchin think that search for definition of economics is a waste time and unnecessary. Robbins, on the other side, denied the view of Pareto, Myrdal and Hutchin and said it is waste of time delimiting the field of economics. According to Macfie, lack of distinct definition of economics could be harmful. In our view, it very important for the students to have clear knowledge about different definitions of economics, so that they gain distinct idea what economics is, even it is difficult to define.

1.1 Early Definitions The early economists denoted economics as the science of wealth and its study. According to Adam Smith Economics is concerned with An Enquiry into the Nature and Causes of Wealth of Nations. J.E. Cairns said that economics deals with the phenomenon of wealth. The French economist J.B Say called economics as a science that treats wealth. 1.1.1 Background of the Analysis of the early Definitions During the time when this definition was made, religious sentiment was dominant in the western society. Natural science was under developed. On the one hand, natural calamity, epidemics and poverty dominated the society. The wealth of the nations was on the other hand mal-distributed, which was seen by religion as a cause of poverty and termed as immoral to concentrate wealth. So, some social reformers like Carlyle and Ruskin called it pig science, because it praised wealth, which was seen in this time as source of all evils. Even religiously liberal peoples saw this as praising of wealth, teaching selfishness and denoted this as dismal science (black science), which degraded human. But the view about subject matter of economics changed and exaggerated emphasis on wealth disappeared. In the last quarter of the19 century, human was placed in the centre of the definition of economics without undermining the role of wealth in the human, social and individual life (Schaffle in Germany and Droz in France). So the central emphasis was shifted from wealth to human. 2. Marshallian definition of Economics Marshal called economics as a study of wealth and man, in other word, a science of human welfare. He described, Economics is the study of the general methods by which men co-operate to meet their material needs and welfare. The aim of the political economy, i.e. economics, is to 1

explain, on which the material welfare of human being depends. Beveridge, Cannan, Pigou and others have the same view. The welfare definition of economics emphasis on the following points:

Wealth is source for human welfare and wealth is referred to secondary position. Economics deal with general peoples and consider with love, affection and fellow feelings. Motivation and desire to maximise profit is not given proper emphasis. Economics study only prerequisites of material welfare (encourage materialistic philosophy of life) and ignore non-materialistic aspect of life.

3. Robbins definition of economics 1931 Robbins gave a new definition for economics. Robbins tried to free his definition from the deficiencies of Marshals definition. He said, Economics is a science which studied human behaviour as a relationship between wants and scarce means which have alternative uses. Robbins definition has following three fundamental propositions:
Ceaseless ends or wants are the source of all economic activities. If there is no want, economic

activity is bound to cease.

Wants are unlimited but the means to satisfy wants is strictly limited. Had the means of satisfaction

unlimited, no economic problems have arisen.

The scarce resources could be used alternatively.

Robbins definition has following superior considerations

Robbins definition takes all material and non-material wants and well being of the peoples into

consideration.
Robbins definition widens the scope of economics and does not confine it on wealth and related

activities.
Marshal regarded economics as science and imperfect art; Robbins on the other hand considers

correctly it as science.
After Robbins definition economics cannot be considered as dismal science, because

it does not

take responsibility of selecting the ends.

Though Robbins definition is superior to both earlier and Marshal definition but it has also some major deficiencies:
If economics is to serve as an engine of social betterment, it cannot deny its responsibility for human

society. The function of economy cannot only be to explain and explore, but also to advocate and condemn. Wants and means conception is contradictory, because it excludes purpose for wants means, which determines human actions. Robbins considers wants as given, but these could also be created. Robbins definition does not include the theory of growth, which is a major issue of modern economics. It does not explain the problem of unemployment.

Robbins has made economics more abstract, complex and difficult. This detracts economics from its utility for the common man. 3. Modern Definition In compare to earlier definitions revolution has been made in economic thinking. The prime credit for this new idea goes to Lord J.M Keynes, the British economist. He defines economics as the study of the administration of scarce resources and of the determination of income and employment. In other words, economics studies the causes of economic fluctuation to observe how economic stability could be promoted. Following the thinking of Keynes, other definitions have been made. Benham, as for example, defines economics as a study of the factors affecting the size, distribution and stability of a countries national income. 2

In respect to economies of the developing and under developed countries, growth of the economy has got central importance in the definition of the economics. It studies, how national income grows over years. So, as Keynes says, the study of economic growth and stability forms an integral part of the study of economics. 4.1 Conclusion regarding definition From the above discussion, we have seen that even modern economists differ in defining economics. The cause is that it difficult to define a growing and wide science like economics. As for example:

To define economics as a science of wealth and material welfare is too narrow. Defining economics as a science of scarcity or choice is too wide. To define economics as a study ordinary business life is too broad. Lastly, it is too narrow to define economics as a part of social welfare.

So, Prof Viner defines that economics is what economists do. We know that economists study resource allocation or resource utilisation. They also study size, distribution, stability of national income and economic growth. So, a proper definition must cover at least all these aspects of the economy. Therefore, economics may be defined as a social science concerned with proper uses and allocation of resources for the achievement and maintenance of growth and stability. Or, economics is a social science concerned with the way the society choose to employ its limited resources, which have alternative uses, to provide goods and services for present and future consumption. It describes and analysis the behaviour of the economy. The definition given by Prof. Henry Smith may be considered as most suitable. He defines economics as study: How a civilised society shares what other people have produced and how the total product of the society changes and is determined. This definition covers all aspects of economics, viz., production and distribution of wealth and the determination of the level and changes in the total product of the nation, which implies the theory of economic growth.

Part II: Micro and Macroeconomics

The modern economists divided economics into following two parts: (i) Microeconomics, and (ii) Macroeconomics. 1. Microeconomics An economic system can be looked as a whole or in terms of its decision-making units. When it is considered as units of smaller parts, it is called microeconomics. It could be considered as units of following smaller parts:

Consuming units (individual consumers and households), Production units (firms, farms, businesses and mining concerns), Individual production factors (labourers, landowners, capitalists, entrepreneurs), and Individual industries (textiles, iron and steel, toy making, transport, power production and supple, telecommunication, etc).

The word micro means a millionth part. For example we may be studying individual consumer behaviour, or we may be studying an individual firms under particular condition. When we study the development of production or prise of particular products, it is called microeconomic consideration of the economy. Microeconomics is also called Prise Theory. In short, microeconomics studies the behaviour of individual decision making units, such as (i) consumers, (ii) resource owners, (iii) business firms, etc. In other perspective, microeconomics studies:
The flow of factors of production (land, labour, capital) from resource owners to business firms, and The flow of goods and services from business firms to consumers.

Microeconomics also explains the composition of production, why some things produced more than the other things. 1.1 Importance of Microeconomics Microeconomics has a theoretical and practical importance in the study of economic activities. From theoretical point of view it explains:

The functioning of the free enterprises, The decisions making criteria of the producers, The decisions making criteria of millions of consumers, How through market mechanism goods and services are produced and distributed in the community, The price building process of products and productive services.

As for practical importance, it helps in the formulation of policies for promoting efficiency in the production and the welfare of the society. So, microeconomics has both positive and normative role. It tells us how economy operates, which is its positive role. And it explains how it should it operate to promote general welfare of the society, which is its normative role. 1.2. Limitation of microeconomics Microeconomics suffers from following limitations:
It cannot give any idea how the whole economy functions, It can not explain why some units of the economy flourish and at the same why other suffer from

crisis,

 Microeconomics assumes full employment, which is unrealistic. In capitalistic economic system,

full employment is attained very seldom and only for short time.

2. Macroeconomics When economy is looked as a whole, it is called macroeconomics. It is also denoted as Income Theory. Macroeconomics is concerned with aggregates and average of the entire economy, such as:

Average National Income, Aggregate output, Total employment, Aggregate demand, Aggregate supply, Average general level of price, etc.

Macroeconomics studies:
How average and aggregate values (such as NI, GDP, total employment, total demand and supply, general level of price, etc) are determined, What causes fluctuation in these values, How economies grow, and How maximum employment and income could be achieved?

Macroeconomics analyses the main determinants of economic development and the various stage and processes of economic growth. Macroeconomics theories have been developed mainly in the Post-Keynesian period, i.e. in the last 50 years. Keynes was pre-occupied with short-rum problems of economic growth and stability. It was Harrod and Domer who extended the Keynesian analysis to the long run problems of growth and stability. 2.1 Utility of Macroeconomics Because of following practical usefulness macroeconomics has gained outspoken importance:
It helps understanding complicated fluctuation of economic development, It provides a birds eye view of the national economy and economic world, Microeconomics analysis is useful to formulate policies for growth and stability of the economy, It is useful to regulate aggregate employment and national income, It helps plan national economic growth rate, It is useful to plan national wage policy, It helps understanding economy in its dynamic aspect.

2.2 Limitation of Macroeconomics Macroeconomics has following limitations:

Macroeconomics ignores the individual actors of the economy altogether. Individual welfare is, however, the main aim of economics. So, for example, increasing national savings at the cost of the individual welfare cannot be wise and acceptable on long term. Macroeconomics overlooks individual difference. As for example, the general price level may be stable, but the rise of the price of food grains can ruin the poor section of the nation. So, while considering the aggregate, it is essential to remember also the nature, composition and structure of the components.

3. Need for Integrating micro and macroeconomics We have discussed that microeconomics has serious limitations. As for example, it cannot give any idea how the whole economy functions. Further it cannot explain why some units of the economy flourish and at the same time why other suffer from crisis. Macroeconomics on the other hand ignores the individual actors of the economy altogether, but individual welfare is the main aim of economics. As for example, increasing national savings at the cost of the individual welfare cannot be wise. Besides, it overlooks individual economic development. For instance, the general price level may be stable, but the rise of the price of essential goods can ruin the poor section of the people. So considering the aggregate, it is essential to consider the nature, composition and structure of the components. Then even during boom some sectors and/or individual industries could suffer crisis. Likewise, during deep depression some individual industries can flourish. So microeconomic and macroeconomic theories and analysis must be integrated to understand the functioning of the whole economy. Then what is true of the parts may not be true of the whole and what is true of the whole may not be true of the parts. So, if we want to get correct solution, it is essential to integrate the two approaches. Macroeconomic policies for growth, employment, income generation and economic stability can not be assured if microeconomic factors are not considered in the problem analysis. 4. Major Economic Problems In view of the scarcity of the resources, the economic problems lies in making the best possible use of resources to ensure maximum satisfaction for consumers and maximum profit for producers. Regarding above conclusion, the economics faces following fundamental problems:

What is to produce? How to produce? For whom to produce? Are the resources economically used? How full employment is to ensure? How satisfactory efficiency of national economy could be achieved? How satisfactory growth could be achieved?

Part III: Nature and Scope of Economics

In the study of the nature of economics, we consider to gain knowledge whether economics is a science. If we answer this question in assertive, then the next question arises, whether the rules of economics could be generalised. Having idea about nature of economics following issues may be discussed:
What is the subject matter of economics? Whether economics is a science or arts? If it is a science, whether it is a positive or normative science? Whether it is a social science? And, finally, whether it can solve practical problems?

Subject matter of economics is:

Consuming units (individual consumers and households), Production units (firms, farms, businesses and mining concerns), Individual production factors (labourers, landowners, capitalists, entrepreneurs), The flow of factors of production from resource owners to business firms, and The flow of goods and services from business firms to consumers.

Before discussing whether economics is a science, it is necessary to explain first what is science? By science we understand a systematised body of knowledge and not merely a collection facts. In science the facts are so arranged that they speak for themselves. That means that the facts give some laws, which explain the facts. Only when laws could be formulated, knowledge becomes science. The economic theories (demand and supply, cost calculation, marginal utility, etc.) have theoretical base but could in most cases be hardly verified. The paradox of economics is that it is a science, but it cannot predict result like Physics or Chemistry. Human being is endowed with freedom of will. Prediction in human behaviour is therefore difficult. To quote Durbin, Certainly will always escape us, and prediction miss the mark. Just because men can learn from experience they can learn from economics itself, so the subject destroys its own conclusion. Economics, thus, presents a continually changing body of doctrine. The ground behind is that the economic phenomena are highly complex, dynamic, and variable. So, it seems impossible to build up a science on such an unstable foundation. The economists have, however, collected facts, the facts have been analysed and put under suitable classification, and general laws governing these facts have been discovered and verified. So, judging by the standard of the other discipline of science, economics must be considered as science. The economists are, however, hindered in a number of ways:
Economic realities are complex and not easy to grasp. Just think of the millions of consumers and

sellers, hundred thousands of commodities bought and sold, whose behaviour should be predicted. The economic facts are constantly changing. It is impossible to hold them. Like in other science, in the economic sphere, experiment is not possible. Economists can only gather facts from operations and no experiments are possible in which environment is controlled. Finally, economists can neither fully understand peoples present actions nor predict their future intentions. Sudden changes in fashion, taste, and other attitude can upset economic calculations.

In view of the above discussion, nothing in economics is certain. It is no wonder that the economists can not agree in some cases. But the economists agree on many points. We may, however, want to argue that absolute agreement is no verification for science. Besides, complete 7

conviction in this world can come only from ignorance. Therefore, we conclude that economics is a science though it has its own limitations. 2. Positive or Normative Science After it is concluded that economics is a science, the next and natural question arises whether it is a positive or normative science. A positive science explains what is. That means, it describes the subject matter. For instance, when we say that the businessmen are motivated to maximise profit, it is positive economics. The normative science, on the other hand, tells us what ought to be. For instance, when we say that the businessmen are motivated to maximise profit - but asked should it be the absolute objective is normative economics. Naturally, economists have to consider whether economists should have moral judgement (normative science) and ask what should be or should they keep them satisfied with the explanation why. 2.1 Classical Views In consideration of the most of the leading classic economists, including J.S. Mill, economics is positive science. They declared that economics should be concerned only with what is and not what ought to be. Even Robbins, who must be considered as an economist of relatively modern time, advocated the neutrality of the economists. The role of the economists is conceived of that of the experts who can explain what consequences are likely to follow certain actions. But they should not judge the desirability of these actions. In other words, the function of the economists is merely to explore and explain and not to advocate and condemn. 2.2 The View of the modern Economists The modern economists have the view that the economists cannot deny their moral responsibility and ethics. For instance, having analysed the causes and impact of maldistribution of wealth, why should not the economists say that it ought to be better distributed? 2.3 Economics is a Social Science Economics is primarily a study of man and not of wealth. And it does not study man as an isolated individual. It studies men, who live in the society affecting it by their economic and other actions. The workers work in factories and produce commodities to be sold. In exchange, they consume goods produced in distant place from unknown workers to satisfy their need. Thus, there is close inter-dependence of millions of people living in distant places unknown to each other. Obviously, this process of satisfying needs is a social process. So, economics has to study social process and behaviour, i.e. behaviour of peoples in a society, in a country or in the world respectively.