Economics · Classes 9-10 · Chapter 1 · 1.3

The Concept of Economics.

One person says economics is about wealth. Another says it is about human welfare. A third says it is the tug of war between endless wants and scarce resources. All three are famous economists, and the exam will ask who said what, and where each of them left a gap.

1. The classical view: Adam Smith

Adam Smith, David Ricardo and John Stuart Mill considered economics to be the science of the production and distribution of wealth. With the progress of knowledge and science the scope of economics has grown a great deal, and this section follows that growth.

Adam Smith is called the Father of Economics, and this school is known as classical economics. Classical economists believed in laissez faire, which means the government interferes as little as possible in economic activity.

Smith's definition: “Economics is a science that examines the nature and causes of the wealth of nations.” For him the economy is built around wealth, so gathering and producing wealth is the main aim of economic activity.

2. Four weaknesses in Smith's definition

The book points to four gaps in Smith's definition. Keep them one by one.

• It does not say how unlimited wants are met with limited resources.
• It stresses national wealth but neglects the individual person and their efforts.
• It stresses accumulating wealth but not how it should be achieved.
• Wealth means goods only; services are not mentioned.

3. The neoclassical view: Marshall

Professor Alfred Marshall's definition: “Economics studies the general activities of human life.”

Marshall stressed human welfare more than wealth. The main subject, in his view, is how people earn money and spend it to remove their wants. The main aim is the welfare of people.

Where is the gap? Scarcity of resources, the core problem of economics today, is not considered in his definition. He discussed only the actual welfare of people.

Marshall and his followers Robbins, Jevons, Walras, Edgeworth and Pareto are known as neoclassical economists.

4. Robbins' definition and its criticism

Professor L. Robbins' definition: “Economics is a science that studies human behaviour as a relationship between unlimited wants and scarce resources which have alternative uses.”

This one is more precise and more acceptable, for four reasons. Wants are unlimited and varied. Resources and time are limited. The same resources have to serve different wants. And wants are met by priority.

Even so, it is criticised on three counts:

• It views the subject too broadly. Many personal and social choices it covers are not discussed in economics.
• It does not mention human welfare as the aim of economic activity, and it leaves out social choice and modern economic development.
• Robbins discussed only value and price, not national income, employment, investment or distribution.

Each definition is like a lamp: some things fall in its light, some stay in the dark. What stays in the dark is the criticism. Shine them one at a time.

Now say whose each of seven criticisms is. Pick up a chip, then drop it in the Smith, Marshall or Robbins box.

5. The Great Depression and Keynes

In the Great Depression of the 1930s the laissez faire policy of the classical and neoclassical economists failed. The British economist John Maynard Keynes then argued strongly for government intervention. Tap the schools in the order they came.

Keynes's remedy is simple: raise government spending and cut the tax rate. That increases aggregate demand and helps the economy climb out of recession.

Try Keynes's remedy yourself. At first the government keeps its hands off; then raise spending and cut taxes.

6. Put the four side by side

The exam often asks whose words these are. Tap a cell in the grid and the whole view of that economist appears below.

7. Check yourself

Three questions in the exam's style. Start with the first.

In the second, first decide whose words they are.

The last one tests the difference between Smith, Marshall and Robbins once more.

The whole note on seven cards.

Source: Economics, Classes 9-10 (NCTB), Chapter 1 “Introduction to Economics”, section 1.3.