What is Economics?
If we take a photograph of our country during day time, we shall find many of us engaged in various types of activities, most of which are related to earning one’s own living and to the manner of satisfying one’s own wants. These human activities, which are generally called economic, are mainly related to production, distribution, consumption and exchange of gods and services. The scientific study of various problems arising out of these economic activities is called economics.
These economic activities would not have been normally necessary if men did not want more than what they can produce. But human nature being what it is, men do need more than they produce and hence there exists an economic problem. Human wants are many: The means to satisfy these wants are limited. These limited means are capable of alternative uses and hence there is a need of satisfying maximum wants with minimum of resources. The study of the attempts to do this is the subject matter of economics.
Various Economic Methods
There are any numbers of methods which can be adopted. A country as a whole can adopt the collectivistic method in which one dictator will take decisions on behalf of all individuals. Or, there may be a completely free society in which all decisions are made by individuals.
Actually there may be a combination of two methods with different emphasis on each of them. In fact economics is the study of the social effects of this decision making process. It decides which commodities and services are to be produced. It also allocates the available factors of production of each line of production. It decides for whom these goods and services have been produced.
Basic Economic Problems
In brief, the basic economic problems may be grouped under four headings:
• The rate of output as a whole or the total national income.
• The composition and prices of output, that is, types of goods and services and their prices.
• The allocation of factors of production among their alternative uses, and
• The distribution of income as rent, profit, interest and wages.
Economics and Prices
Taking up the first, it can be suggested that economics is not entirely a science of prices. For, the area covered by prices does not embrace all the economic activities which are directed towards the satisfaction of wants. Nor does it include all the items which economists normally study. Married women do work at home. Whether they work at home or work outside for money payments, their work results into goods and services which are economic. Similarly, in a country like India most of the exchanges of goods and services take place without money and yet, these activities do lead to wealth and economic prosperity.
Economics as Social Science
At present economics deals with a social phenomenon. We owe so many things to society such as division of labor, co-operation of people in various economic activities, existence of money and its management, capital and technological knowledge, etc. And economics is nothing if not a study of all these things – money, capital, division of labor, etc. Economics is a social science because it is a study of human efforts to satisfy human wants in the conditions of limited resources which have alternative uses. These efforts and human activities are carried on in groups or in societies.
Economics and Human Behavior
It is difficult to draw reliable generalizations about human behavior in its ordinary business of life. Human behavior is guided by so many impulses and is an outcome of various actions and reactions of social forces in which individual vagaries or individual whims and caprices, social laws and customs, traditions of a family or a group, political prejudices and emotions etc. Play a part so that it is difficult to make any generalization. Thus, the first group of definitions seems to be defective in various ways, although it is not necessary to reject them totally. We should try to retain what is useful in them.
Economics and Scarcity
There are many wants which human beings would like to satisfy. Human beings try to satisfy as many of them as possible. Each of these wants is satiable, but taken together, one can say that wants are unlimited. Second, we have a large amount of resources capable of satisfying these wants. These resources are in fact means which are capable of alternative uses – although these resources are limited since they cannot be increased to any amount we desire. Third, as wants are many and unlimited, while means are limited and capable of alternative uses, there is a need to economize. The ends have to be given varying importance and hence reason has t be exercised in choosing our ends or wants and in choosing the means for attaining them. The study of these choices and the generalizations which arise from the process of taking decisions is the subject matter of the science of economics.
Economics and Welfare
In making the study of economics wholly scientific we separated it from the human considerations. As a matter of fact, no social science can be studied in vacuum; it must take human beings into consideration, which will surely lead to the study of human welfare, and therefore to economic welfare. Second, when we talk of choice in this definition, it becomes too wide, because we are required to make choice for so many problems which might be political, biological, sociological, etc.
Its relation with other social sciences
There is no doubt about the fact that economics is very closely related to ethics. The early economic thinkers described economics as the handmaid of ethics. And formerly in the university teachings, economics was a part of moral sciences. Ethics is concerned with what ought to be. It describes the moral code of behavior and is much more related to customs and traditions. At a glance we may be surprised as to how on earth economics can ever be related to ethics. Economics describes, while ethics prescribes. Economics is amoral, while ethics is moral. Economics is a positive science as it is concerned with ‘what is’, while ethics is a normative science as it is concerned with ‘what ought to be’. Ethics is concerned with ends as such while economics is concerned with arranging means to ends; it has nothing to do with ends as such. Ethics is concerned with the mode of behavior and the conduct of man while economics takes for granted all these things. Ethics is concerned with – all immaterial, eternal and sublime things while economics, many time, is concerned with all baser things in life – all material things.
Economics and Politics
The second very important field of social sciences with which economics is closely related is politics. One can almost say with confidence that it is difficult to draw a line between the two. They overlap each other. Politics is concerned with the philosophy of state and the methods of organizing the state. In both these respects economics has to enter into a relationship with politics. The economic organization and the principles on which the economic system of a country works depend very much on the fundamental philosophy of the state. The nature of the working of the economic system differs very much in different types of states. Secondly, economics very often comes into closer relation with politics especially with the methods of organizing a state. In matters of legislations, like company law and nationalization, or in matters of public finance, economics plays a very important role. In fact, nowadays, the government has become a huge economic machine. Most of the functions, such as, education, medical care, support of old people, unemployment, etc. Which were formerly looked after by the church or family or group organizations, are now taken up by the state. A very important sector of the total national income is produced either through the state or within its control. Maintenance of full employment, optimum allocation of economic resources, equitable distribution of national income – all these have been the aims of the government economic policy, be it a socialist state or a capitalist state. It will not be surprising if the old term political economy will again come into use. Political economy is perhaps the most appropriate work for present day economics when planning is our main concern.
Economics and History
It is also closely related to history which is nothing but a scientific study of the records of facts. Mere facts cannot be history, when these facts are used in a particular way in order to bring out general trends, they constitute history. It is helpful in several ways. Economic facts of the past constitute the raw materials test tube, acid, powders etc. Of a chemical laboratory for the economic historians, by the help of which he can test his economic theories. History of economic institutions, can also suggest the direction of change or evolution. As it is difficult to conduct controlled experiments in economics, history has a special importance. At one time, the historical method occupied a very important place in the methods of economics. Moreover, the knowledge of history is essential for an economist who would like to apply his economic theory to the practical field. For the study of economic frictions and to find out their importance, the study of history is very helpful; economic policy cannot be evolved without a close understanding of economic history.
Economics and Psychology
Similarly, economics is closely connected with psychology, mathematics and statistics. As economics, to a certain extent, is a study of choice or preferences, psychology comes into closer contact with it. Quite recently, psychology is developing into a science. There is a science of mass psychology. As division of labor has been adopted to a greater extent, man has no time to bother about anything else. He has become machine-like and hence there are reliable generalizations of mass psychology. Similarly we have industrial psychology, social psychology, etc. Which help us a great deal in determining the economic quantities such as saving, investment, market demand curves, reactions to price changes, etc.
Economics, Statistics and Mathematics
Statistics is also very useful to economics. In fact, it has become a basis for economic studies. It helps an economist to verify his conclusions; it draws his attention to underlying currents. It helps him a great deal in interpreting economic facts of the past. No economist can do without statistics nowadays. Mathematics is also being increasingly used in economics with a view to sharpen economic analysis. Thus economics is closely connected with many other sciences.