Origin and historical background of economics

The term ‘Economics’ has been derived from the Greek word ‘Oeconomicus’, which means management of the household. Thus, economics means; ‘household management’ or ‘management of household affairs’. Household management refers to managing the unlimited wants of the family members within the limited income of the family.

The beginning of Economics was made by the Greek phosphor Aristotle during 400 B.C. and confined the study of economics up to household management, acquiring and making proper use of wealth.

Economics in the middle age came as part of moral science/philosophy. It was the time of mercantilism when economics was the belief that the money was wealth and for such, accumulation of gold and silver was the key to prosperity. It means, if one country had more gold than others, it necessarily better off. Thus, according to them, accumulating gold and silver was the key to success.

The Economists of the 18^th century developed economics as a new social science. With the publication of the famous book “An Inquiry into the Nature and Causes of Wealth of Nations” by Adam Smith (1723-1790), the economics got its space as an independent and developed discipline. Therefore, as an honor, Adam Smith is known as the Father of Economics. Before him, economics was considered as the part of other social sciences, part of ethics, part of political science.

Economics definition for students

Classical Period (1776 A.D. – 1890 A.D.)

It is the first modern school of economic thought. The leader of this school of thought is Adam Smith and other important followers are J.B. Say, J.S. Mill, Malthus, David Ricardo, F.A. Walker, etc. The classical school of economic thought considered economics as the science of wealth.

Neo-classical Period (1890- 1932)

This period is the most fertile period of economics as many new theories were developed, redefined and reformulated during this period. The leader of this school of thought is Afraid Marshal and other followers are A.C. Pigou, Fisher, Carl Menger, Edwin Cannan etc.

The extended the matter of economics from wealth accumulation to welfare and satisfaction.

Modern Period (1932 A.D. onward)

The era of 20^th century in the history of economics is known as the modern period. This is the time period in which many economic theories are contributed in a scientific way. The famous economists of this school of thought are Lionel Robbins, John Maynard Keynes, Paul Samuelsson, etc.

This school of thought changes the focus of the study of economics from the welfare approach to the study of scarcity and choice.

Definitions of Economics

Economics is a dynamic social science and its definition has been changing with reference to time and era of thoughts of economists. Economists differ in their definitions of economics from each other.

Thus, there is no singular widely accepted definition of economics. Jacob Viner says that what an economist does is economics. Economists at different times have emphasized different aspects of economic activities and have arrived at different definitions of economics. The overall definitions of economics can be viewed through the following three perspectives;

1. Wealth Definition

2. Welfare Definition

3. Scarcity Definition

Wealth Definition/Classical Definition/Adam Smith’s Definition

The definition of economics in terms of wealth was given by Adam Smith (1723-1790) a citizen of Scotland, in 1776 A.D. in his famous book “An Enquiry into the Nature and Causes of Wealth of Nations”. By publishing this book, Smith has separated economics from other social sciences and defined economics for the first time. So, he is popularly known as the Father of Economics as well as the leader of the Classical Economic School of Thought.

According to Adam Smith, “Economics is the science of wealth”. The meaning of wealth as used by Adam Smith refers to an abundance of money. Economics then becomes a subject that teaches about ways and means of increasing the wealth of nations. Thus, according to this definition, economics is the study of people's activities related to the accumulation of more and more wealth.

Some other economists like J.B Say, F.A Walker, J.S Mills, and others also declared economics as a science of wealth. According to J.B Say Economics is the science which treats wealth. F. A Walker made it clear that economics is that body of knowledge which relates to wealth.

Characteristics of Wealth Definition

The major features or characteristics of the definition are listed as;

Study of wealth: The definition of economics given by Adam Smith assumed that Economics deals only with the study of wealth. Therefore, it is related to wealth earning economic activities of a man like production, consumption, exchange, and distribution.

A secondary place to mankind: The wealth definition of Adam Smith has given the first priority to wealth and the second to mankind. He assumed that mankind is for wealth but wealth cannot be for mankind. Classical economists believe that the economic prosperity of any nation depends only on the accumulation of wealth.

Study of economic man: Adam Smith claimed that economics studies the behavior of only those people who have the only objective of earning more and more wealth at any cost and by any means. A human being of such nature is called ‘Economic Man’ and his main objective is to accumulate more and more wealth.

Source of wealth: This definition assumed that wages earned by labors are the only source of income or wealth of the nation. Adam Smith has suggested that active labors can earn a high amount of wages through the division of labor. It increases the productivity and distribution of goods and services and thereby the wealth of the nation could be increased.

Meaning of wealth: According to the definition, wealth includes only material goods. Material goods are those goods, which are tangible goods, which are visible such as pen, book, pencil, gold, etc. the non-material goods like teachers' services, doctor’s services, etc. have been excluded from the wealth definition of economics.

Criticisms of Wealth Definition

This view of economics as a science of wealth was criticized by Carlyle, Ruskin, Marshall, and other economists of the 19^th Century. They criticized the wealth definition in following grounds;

Too much importance on wealth: The wealth definition has given primary concern to wealth by undermining the value of human beings. This idea was found irrational and now the emphasis has turned into human welfare. Thus, the real fact is that the human being is more important than wealth, and in this definition of human welfare is missing.

Meaning of wealth: According to this definition, wealth includes only material goods. Material goods are those goods, which are tangible goods, which are visible such as pen, book, pencil, gold, etc. the non-material goods like teachers' services, doctor’s services, etc. have been excluded from the wealth definition of economics.

The narrow meaning of wealth: Wealth definition limits the definition of the word ‘wealth’ only up to material goods like vehicles, industries, raw materials, etc. It didn’t include the contribution of services of teachers, doctors, lawyers, etc. in modern economics the word ‘wealth’ includes both services and material goods.

Single source of wealth: Wages earned by labors are only one source of wealth of the nation as per the wealth definition. But the critics pointed out that the natural resources, human resources, capital resources and physical resources are a source of wealth for the nation.

Unrealistic concept of economic man: Wealth definition is based on the assumption of economic man and which is almost rare to found in real life. People may get more satisfaction from the feeling like love, respect, self-esteem, sympathy, cooperation, friendship, trust, etc. which might provide greater satisfaction than wealth in life. So, the pure economic man cannot be found in real life.

The limited subject matter of economics: The subject matter of economics is not only limited up to wealth. Its subject matter is nowadays covering the study of human welfare and the betterment of societies.

Conclusion

Despite the above pointed criticism, the wealth definition has its own value and importance as it is the first modern definition of economics and provided the base for other schools of thoughts.

Welfare/Neo-classical/Marshallian Definition of Economics

The welfare definition of economics was given by the leader of the Neo-classical school of economic thought, Alfred Marshall (1842-1924). He was a renowned British scholar and Professor of Economics at Cambridge University. He published the book “Principle of Economics” in 1890 A.D. and defined economics in terms of material welfare.

He gave, ‘Man’ the first place and ‘Wealth’ as secondary and clarified that wealth is for man and man is not for wealth. Wealth is not the ‘End’, it is only a ‘Means’ to attain welfare.

Economics is the study of human activities in the ordinary course of business. It studies how man attains his income and how he utilizes it. In this way, economics studies wealth, on one hand, and on the other hand, it is a part of the study of man which is more important. According to this definition, it becomes the science of human activities instead of the science of wealth.

In his second book, ‘Principles of Economics’, Dr. Marshall defined it in these words, "Economics is the study of humans, in relation to the ordinary business of life. It studies that portion of the personal and social activities, which are closely related to the attainment of material resources, related to welfare and its utilization.” The Marshallian definition has supported by his follower economists like A.C. Pigou, Cannon, etc.

Characteristics of Marshall’s Definition

The major features or characteristics of the definition are listed as below;

Greater Emphasis on Human Aspect: Marshall has given balanced importance to Means and Ends, through his definition. He has stated in clear words, that it is, on one hand, is the study of wealth and on the other hand, more important to this is the study of the human aspect. In this way, he removed the defect of ignorance of the human aspect, in the old views of Adam Smith’s time, and gave more emphasis to the human aspect in clear words.

Material Welfare: Marshall in his definition gave more importance to the means of material gains or material welfare. According to him, economics studies, those material resources, on which welfare depends. It means the welfare or satisfaction is obtained from the consumption of physical goods or material goods and excludes the satisfaction obtained from non-material goods or services.

Study of Social, Normal and Real Persons: According to Marshall, economics studies only social, normal, and real persons. The study of persons living outside the society or in forests, who-are unusual, alone and abnormal, is not done in it. The activities of unusual persons like – an insane, a miser, a saint or Mahatma, etc. are said to be outside the area of the subject matter of economics. According to Marshall, it studies the economic activities of only social, normal, and real persons.

Study of the Ordinary Business Activities of Life: In his definition, Marshall paid emphasis to the Ordinary Business Activities. These ‘ordinary business activities’ refers to those economic activities, which are related to the attainment and utilization of wealth. In this manner, Marshall gave a clear place, to human economic activities.

Social Science: According to Alfred Marshall, economics studies those human beings who live in society. It does not include isolated persons not belonging to a society such as beggars, saints, monks, etc. As economics studies the economic behavior of the people living in a society, it is thus called social science.

Normative science: According to Marshall, economics is a normative science. Economics teaches or deals on how to have greater material welfare of man.

Criticisms of Marshal's Definition

Professor Lionel Robbins criticized Marshall’s definition of economics and introduced modern definition of economics in 1932 A.D. The major criticisms made by Robbins in following ground:

Undue influence on immaterial things: Marshall considered only material things. But immaterial things, such as the services of a doctor, a teacher and so on, also promote the welfare of the people. So, Robbins rejected Marshall’s definition as being classificatory and illogical in itself.

Narrow definition: According to Robbins, the use of the term material and discussion of material welfare is the only part of economics.

Weak connection between economics and welfare: The Marshallian definition tried to establish the connection between economics and welfare. However, economics does study different activities not ensuring welfare like, production of wine, cigarette, etc. as their income is included in national income.

Welfare cannot be measured: Welfare is a subjective concept and it varies from man to man, place to place, and time to time. It cannot be precisely measured. Welfare is generally measured in terms of money and money itself is not an accurate measuring rod of satisfaction as poor and rich persons derive the different levels of satisfaction from the same amount of money.

Exclude human science: According to Alfred Marshall, economics studies the behavior of those human beings who are living in society. But the critics of this definition argued that economics should study total human beings whether they have actively participated in social functions or they are isolated from society.

There is no accurate meaning of the ordinary business of life: The meaning of the given expression is not clear in the definition.

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Origin and historical background of economics