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Economics: The Introduction
T
he study of every discipline starts with the process of defining it. Economics is no exception to this. But the challenge of articulating an over arching definition of any discipline has never been an easy task, and at
the end one has to be satisfied with a partial definition. Different economists have seen the discipline with differing perspectives and have been coming up with differing definitions—at times, a large number of such definitions became either narrow or incomprehensible. But it is necessary to have a working definition of the subject if one intends to study it.
Before arriving at our own working definition of the subject, we may cite here two highly acclaimed and internationally established attempts in this direction:
1. Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.1
As per the definition, there are two key ideas in economics—that goods are scarce and that society must use its resources efficiently. Indeed, economics is an important subject because of the fact of scarcity and the need for efficient use of the resources.
Over the last half a century, the study of economics has included such varied topics that the subject serves different purposes to different students of economics. Some study it to make money (basically, most of its students in the developed world study economics to earn more money. But the same is not correct in the case of the developing world. The truth is that in the developing world economics has only been read and taught, not applied—if we do a sweeping generalisation). Others study economics to know about poverty, unemployment, human development, shares and debentures, banking norms, prices and their movements, e-commerce, etc. Still others might be studying the discipline to enhance their knowledge of economics.
2. Economics studies how individuals, firms, governments, and other organisations within our society make choices and how these choices determine a society’s use of its resources.2
Human life depends on the consumption of various materials which are made up of the resources available on earth. As there is no limit to human wants, we need infinite resources to gratify our needs. But the resources are limited! Now it is upto the individual and humanity at large as to how they try to satisfy their competing needs to get fulfilled by the limited resources. It means we need to make some choices before we utilise the scarce resources
by prioritising some of our needs. In this process, some needs might never get fulfilled. At the same time, there might be some needs which may be fulfilled again and again with the available resources.
Economics is the discipline which studies how individual, society and the government make their prioritised choices in the process of using the scarce resources to gratify the various needs and wants of life. Making such choices is an art as well as a science. As times change, the choices change. As space changes human needs change and so modify the choices. After studying and surveying the various choices made by humanity at large in different time and space, there evolved the discipline of economics. As economics is an exercise in the space-time continuum and it deals with living human beings, it is a very dynamic subject and should only be read in this perspective to have the real feel.
It is essential to feel the subject one intends to study. The fundamental way of doing this is starting with the definition of the subject. But the definition, at times, or even most of the times, becomes very abstract, jargon-laden and technical. Such a definition might not give a proper feel and understanding of the subject to a person who does not belong to economics. Most of the students of economics face difficulty in understanding the complete meaning of the definition. That is why a very general and layman’s definition is needed.
Human beings in their day-to-day lives are busy doing so many things. There are different activities we are involved in throughout our lives. These activities fall under different categories.
Economics studies the economic activities of mankind. Similarly, political, social and administrative activities of mankind are studied under Political Science, Sociology and Public Administration, respectively. That is why these disciplines are broadly categorised as humanities as all of them study human activities. There are many more specialised human activities which are studied under many more disciplines.
Which activities of mankind are economic activities? The activities which involve profit, loss, livelihood, occupation, wage, employment, etc., are
economic activities. Economics studies all these activities. Today, economics has many branches and studies highly diverse subject matters, right at the global, macro and micro levels.
Why do some people go for fuel-efficient cars while others go for fuel- guzzling sports cars? Why the poor are poor? Is capitalism doomed to intensify economic inequality? Will the process of globalisation be able to bridge the poor–rich divide and have a universal homogenising impact on the world? Such varied and many more questions fall under the domain of economics. These days we also can see information technology giving a typically new dimension to economics.
The relation between economics and the economy, simply saying, is that of theory and practice. While the former is a discipline studying economic behaviour of human beings, the latter is a still-frame picture of it. Economics will come out with theories of market, employment, etc., and an economy is the real picture of the things which emerges after the application of those theories.
Economy is economics at play in a certain region. This region is best defined today as a country, a nation—the Indian Economy, the Russian Economy, the French Economy, etc. Economy as such means nothing. It gets meaning once it is preceded by the name of a country, a region, a block, etc. When we say developed economies, we mean economies of developed countries.
Countries of the world might be facing some common economic challenges. At the same time, they might be facing some highly specific challenges. Economists, during the period of evolution of economics, have suggested some fixed number of theories and methods of solving those economic challenges. Now it depends upon the choice of the countries as to which set of principles and theories they select for solving their economic challenges. Further, many countries selecting the same remedy and tools to fight the same problems might have similar or dissimilar results during a given period. At the same time, two economies selecting different tools to solve the same economic problems might experience the same results or
completely different results. Why is this so?
Basically, economic theories are expectations of human behaviour about their economic activities and as human behaviour depends greatly on many internal and external factors, the results are likely to have diversities. The level and quality of natural resources, the quantity and quality of human resources, the socio-political milieu, the historical background, the psychic make of the human resource, etc., are some of the factors which individually as well as collectively impact an economy while carrying out economic activities. These things make it highly difficult for economists to forecast the kind of impact a particular economic policy will have on a particular economic setting. Ultimately, implementation and delivery systems also play a highly vital role in solving economic challenges in a country, which economists started studying after the 1960s. Therefore, it is correct to say that economics has less diversity than the economies. There will not be any exaggeration if we say that no two economies of the world are exactly the same, though we might classify them into broader categories like developed and developing, agrarian and industrial, etc.
This diversity makes economics a highly interesting discipline. It is through these diverse facts of the economies that economists have been able to modify and remodify their ideas on the subject of economics. The evolutionary history of economics is nothing but modifications in the past theories on the basis of contemporary results and experiences of the economies. It will be correct to say that economics has developed out of real life practices and especially from the evolution of practice into theory. As practices will be having newer dimensions, the theories of economics will also have newer and more imaginative dimensions.
What is the real purpose of studying economics? What have economists ultimately been trying to articulate? And what has been the focus of economics and the economists since the birth of the discipline?
Though economics today studies a wide range of issues and topics, if we take an overall picture, its essence has been very simple—the betterment of human life on earth. Improving living conditions of the humanity at large has
been the real and ultimate goal of the discipline. In this process, economists have been articulating a number of theories and propositions as to how an economy may maximise its economic potential and worth. The first and the most famous work in this direction was by the Scottish philosopher- economist, Adam Smith in The Wealth of Nations (1776). One can trace the origin of the classical school of economics to this work. Similarly, in the following years and centuries, many outstanding works were produced by many great economists who were trying to improvise better ways of maximising the fruits of economic activity. Economics and the economists have a common goal, i.e., searching for possible alternatives for the betterment of human life.
The main challenge of any economy is to fulfil the needs of its population. Every population needs to be supplied with some goods and services for its survival and well-being. These goods might include basic needs such as food, shelter, garments, etc., while it might also consist of refrigerators, air conditioners, cars, medicines, computers, etc. Similarly, the services people need may range from healthcare, drinking water supply, education to advanced and highly sophisticated services like banking, insurance, airways, telephones, internet, etc. As an economy moves up the ladder of development, the process of fulfilling the needs of the population becomes a never-ending phenomenon. As an economy achieves success in supplying one set of goods and services to its population, the population starts demanding another set of goods and services, which are of a higher order. And thus goes on the struggle of the economy—solving one challenge and focusing on another. The standard of living of one set of population varies from another depending upon the attempts and the successes of the concerned economies as to which extent they have been able to fulfil the needs of their population.
There are two aspects of the challenge that economies face. First, the availability of the goods and services required by the population and second, the presence of the supply network. Every economy has to, at first, guarantee the required level of goods and services out of its production process. For
this, proper level of production capacity should be built which requires a particular level of capital formation or investment. From where the investible funds will be managed is altogether a separate question. Whether the investment will come from the government, the domestic private sector or the foreigners? Once these details are cleared and selected as per the socio- economic condition of the economy, a proper distribution network for goods and services produced is assured.
In the arena of distribution network, we have three historically existing models—state, market and state-market mix. In the first type of distribution system, the state (i.e., the government) takes the sole responsibility of supplying goods and services required by the population with no payments being done by the consumer—the former Soviet Union and Communist China being the best examples. In the second category comes the market mode of distribution which functions on the basis of price mechanism. In this system, goods and services are made available in the market and on the basis of their demand and supply, their prices are determined in the open market and finally they get distributed to the population. This was the distribution system of the capitalist economies—the whole of Euro-America. The third and the most prevalent mode of distribution, the state-market mix, developed out of the experiences of the former two systems. This distribution system has certain goods and services which might be made available to the population freely or at the subsidised prices by the state and some might be supplied by the market for which consumers need to pay. Almost all economies of the world today follow one or the other kind of distribution system. As the socio-economic composition of the population of an economy changes, the mixture of the goods and services to be supplied by the state and the market get redefined in the economies from time to time.