Definition of Economics

March 23rd, 2007
Tags: Economics

The term “economics�? comes from the Greek “oikos�?(household) and “nomos�?(custom or law). In Ancient Greece it meant the rules of managing your household in a reasonable way, so that you save, keep and increase your belongings and maintain decent relations within your family and neighborhood.

Throughout the years, the definition has changed greatly but the essence of Greek meaning stayed: economics is how we manage things limited by our possession – both our property and property of others under our control.

1st component:
Economics studies management of scarce(limited) resources.

Many centuries went by and the field of economics changed its scale – from household to economy of town and then to country’s economy. So, economics becomes a tool of a state ruler(King, president, tsar or government) that helps him promote well-being of population and himself.

This sense is used in Adam Smith’s The Wealth of Nations published in 1776. At that time economics shaped as an independent and separate science. The forefather of classical economics uses the term “political economy�? and defines its subject:

Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to supply a plentiful revenue or product for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.

2nd component:
Economics studies the well-being of a nation that is managed by the statesman.

As a matter of fact, the term “political economy�? was used in 18th and 19th centuries by classical economists (Adam Smith, David Ricardo, […]), Karl Marx but it was gradually replaced after publication of Alfred Marchall’s Principles of Economics (1890), a major book of neoclassic economics.

By that time economics had shaped as an independent and separate science. It has accumulated vast fundamental material, described many economic mechanisms and offered a wide variety of theories.

Although the economic theory continued its development and many economic schools have appeared by now, the subject of economics formed by neoclassicists is very much close to its modern meaning. Marshall reoriented economics towards the study of humanity and provided economic science with a more comprehensive definition:

Political Economy or Economics is a study of mankind in the ordinary business of life. It examines that part of individual & social action which is most closely connected with the attainment & with the use of material requisites of well-being

The following are the implications of this definition:

1. Economics is a study of mankind;
2. Human life has several aspects – social, religious, economic and political – but economics is concerned only with the economic aspect of life;
3. Promotion of welfare is the ultimate goal, but the term welfare is used in a narrow sense to meet material welfare only.

Besides Marshall, there are other economists who have defined economics in terms of welfare. According to Pigou, “the range of enquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money”.

According to Edwin Cannan, “the aim of political economy or Economics is the explanation of the general causes on which the material welfare of human beings depend”.

Marshall gives clear explantation that economic activity is different from other activity. For example,

If a student visits a friend who is ill, it is a social activity,
If a person give his vote in an election, it is a political activity.
If a person goes to church/temple it is a religious activity.

Marshall says that economic activity is different from above mentioned activities. A farmer going to the field or a worker going to the factory to work is an economic activity – they are working to earn money. With that money they will buy things to satisfy their wants. In other words, economics deals with wants, efforts and satisfaction.

In the words of Marshall, “man earns money to get material welfare.” Marshall gives importance to welfare and man. This definition came to be called the welfare definition.

3rd component:
Economics is aimed welfare promotion by satisfying needs and wants of population by managing its efforts.

It is important to know that centuries XVIII and XIX are the centuries of rapid industrial growth and establishment of capitalism. In this context the question of organization of human resources is significant not only for the nation’s prosperity but for the position of state at international arena.

The XX and XXI centuries are marked with development of international business, appearance of international organizations(like WorldBank, IMF, UN) and world-wide globalization.

Such evolution urges states to look find advantageous positions in the international division of labor, coordinate its economic life with other countries and establish global economic network of cooperation. Obviously, when economic life exceeds the bounds of nation state, economics has nothing but widen its scope to include world economy with its regard to a particular state.

4rd component:
Economics studies the ways and methods of state’s well-being in the global economy.

Parts of economic science

Well, to put an end to the economics definition, we would like to give you a detailed picture what economics studies, as long as the definitions presented before were quite common in order to give you a general idea of the subject.

Economics is the social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems.

Its major division are:
Economic theory that studies the fundamental aspects of economic life. It defines the main economic problems, categories, laws and mechanisms.

Microeconomics is a level of economic theory that studies economic activity of small economic unities like households, firms (supply and demand, market equilibrium, elasticity, pricing, production, consumption, competition models, labor market, wages, interest rate, rent, etc.)

Macroeconomics is a level of economic theory that studies a nation’s economy. The major issues problems here are inflation, unemployment, economic growth, government role, aggregate demand and supply, business cycles, monetary and credit policy, fiscal policy, budget, social policy, etc.)

International economics studies the mechanisms of world economy and international economic relations (international trade, finance, world labor market, global problems, external relations, international division of labor, specialization, exchange rates, etc.)

Economics also has a variety of subdisciplines:
Behavioural economics, Bioeconomics, Econometrics, Economic geography, Economic history, Economic sociology, Energy economics, Entrepreneurial Economics, Environmental economics, Feminist economics, Institutional economics, Islamic economics, Labor economics, Law and Economics, Mathematical economics, Monetary economics, Real estate economics, Resource economics, etc., etc.

Economics has direct applications in personal finance, business, finance, politics, government.

An economist is someone who has a university degree in some field of economics and uses economic concepts and data in his work.