2. scope and importance of economics 2.0 introduction...economist describes different ideas or views...

Teaching of Economics

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2. Scope and Importance of Economics

2.0 Introduction:

Scope mean the area or field with in which a subject works, or

boundaries and limits. In the present era of LPG, when world is considered as

village and economy of every nation is regarded as global economy. The

economics is regarded as engine of the economic development of the world. In

this ICT based global era, the only subject which is ever growing is economics.

Being the only dynamic and living subject of the present time its area of

application is widening day by day. As a result, the scope of economics is

expanding with passage of time. There is hardly any field of life in which could

escape itself from the influence of economics. Keeping this fact in mind it

becomes imperative to have a look on the scope of Economics. Different

Economist describes different ideas or views about scope of Economics.

2.1 Scope of Economics:

Prominent economist, J.M. Keynes, in his book: “The Scope and

method of Economics”, has included the following three points under the study

of the scope of Economics: (1) Subject Matter of Economics (2) Nature of

Economics (3) Relationship of Economics with other Sciences. Many economics

study the limitations of Economics instead of its relationship with other

sciences, under its scope. So, the following three factors should be studied under

the scope of Economics:

It will be easier for us to understand this subject by studying at length the

different parts of the scope of Economics i.e. the subject – matter of Economics,

nature of Economics etc.

2.1.1 Subject – matter of Economics:

There has been a lot of controversy among the economists about the actual

scope of economics. Various views prevail among the economists regarding the

subject matter of Economics:

(i) According to the famous scholar, Aristotle, the subject matter of economics

is management of the state and household.

(ii) According to classical economist Adam Smith, the subject Matter of

Economics is concerned with the inquiry of the nature and causes of wealth of

nations.

According to Ricadro, “ Economics is related with how the produce of the earth

is distributed.”

Scope of Economics

Subject Matter Nature

Science-Art

Limitations


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(iii) Marshall, while widening the subject –matter of Economics, has included

in it the study of those activities of social men which are related to the material

goods that promote welfare.

According to Arthur Cecil Pigou, Economics studies the part of social welfare

which can be brought directly or indirectly into relationship with the measuring

rod of money.”

Professor Boulding Aptly remarks that , “To define it ( Economics) as a study

of mankind in the ordinary business of life “ is surely too broad; To define it as

the study of material wealth is too narrow. To define it as the study of human

valuation and choice is again probably too wide, and to define it as the study of

that part of human activity which is subject to the measuring rod of money is

again too narrow.”

(iv) Lord Lionel Robbins in his book, “Essay on the nature and significance of

Economics Science” has further extended the subject – matter of Economics.

According to him, the subject – matter of Economics deals with those activities

of human beings which they perform (a) as an attempt (b) to get the scarce

means (c) which satisfy their unlimited wants. When the (d) economic goods

or wealth, thus obtained, satisfy any one want, another want immediately crops

up. In this way, an Economic Circle of, Wants – Efforts – Wealth –

Satisfaction …… continues to operate as shown in Fig 2.1.

Fig 2.1. Showing Economics Cycle of Wants

This economic circle is the very beginning and end of the subject – matter of

Economics.

Keeping all such situations in mind Keynes, “Political Economy is said to have

strangled itself with definitions.”

The famous observation of Mrs. Frances Wootton, “Whenever six economists

gather, there are seven opinions,” fully applies to the subject – matter of

Economics.


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But it was prominent economist, J.M. Keynes, who in his book: “The Scope

and Method of Economics”, has described the following two approaches to the

study of Subject Matter of Economics:

Fig2.3: Showing Approaches of study the Subject Matter

A) Area of Economic Activities: The majority of scholar are agree with the

fact that subject – matter of Economics deals with the study of the economic

activities.

According to Chapman “Economics is that branch of knowledge which studies

the consumption, production, exchange and distribution of wealth”

Fig 2.2: Flow chart of Economic Activities

Professor Boulding has also divided the economic activities into four parts:

(1) Consumption: Consumption is that economic activity which deals with

the use of the utility of goods and services for the direct satisfaction of wants.

Wearing clothes, eating food, etc. are activities of consumption.

(2) Production: Production is that economic activity which is linked with

the increase in the utility or adding price values to the goods and services. The

process of making biscuits from floor is production. The process of transporting

the sand from the river-bank and selling it in the city is also production. There

are five main means of production: (i) Land (ii) Labour (iii) Capital (iv)

Organization and (v) Entrepreneurs.

(3) Exchange: Exchange is that activity which is related to the sale-

purchase of a thing. This sale and purchase is made in terms of money. So, this

activity is related to the measuring the value of the commodities and services

with the measuring rod of Money. This activity is also called as Price

Determination.

(4) Distribution: It deals with the distribution of national income among

various factors of productions because economists assume that whole national


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income is produced by the four factors of productions. This is also known as

price determination of the means of the production, i.e. the prices of land as rent,

price of labour as wages, price of capital as interest and the price of the

entrepreneur as profit. This activity is also called Factor Pricing.

In these days in Neo Economics era of LPG. The Economists are of the view

that the fifth most important activity of the economics is management of the

Finance, the most scarce resource of the modern society. So in these days the

economic activity flow chart has been replaced with the following chart:

Fig 2.3: Modern flow chart of Economic Activities

(5)Public Financing Management: The modern economist Paul A. Samuelson

was of the view that the most important function of the economists is to manage

the fiancé of the nation. In the Public Finance, we study the activity of

government related to generation of money (Income-Monetary and Fiscal

Policy) and Expenditure (Welfare and Development Economics). It includes the

study of theories of tax determination, Public Income, Govt. Expenditure on

public welfare and social profit maximization.

B) Parts of Economics or Levels of the study of Economics:

Prof. Ragner Frisch has studied the subject-matter of Economics in two parts:

Fig2.4 Showing Levels of the Study of Economics


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(i) Micro Economics: It studies, the economic activities of an economics

unit or a small group of more than one unit i.e a consumer’s demand for

something or demands of the few firms of the industry. In this part of

Economics, we study Commodity pricing theories/ Price determination (demand

theory and Supply theory), Factor Pricing/ Theory of Distribution among factors

of production rent, wages, interest and profit or factor pricing and The theory of

economic welfare related to economic problems :

Fig:2.5 The area of the study of Micro Economics theory

i. What to produce?

ii. How to produce?

iii. When to produce?

iv. For whom to produce?

(ii) Macro Economics: Macro Economics study the economic activities of

the entire economy as collectively for example, total aggregate demand of all the

goods and services. Macro Economics deals with national income, revenue, total

employment, price level, money, banking, international trade, economic

development, etc., In Macro Economics, we discuss theory of income &

employment which is related to study the theory of consumption function,

theory of Investment, and theory of Business cycles or fluctuation. The theory of

Fig: 2.6: The area of the study of Macro Economics theory


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General Price Level and Inflation is also part of the discussion of the Macro

Economics. Macro Economics also deals with the study of model of economic

development and Growth, Planning for growth and Economics policy for

Growth and Development of the Nation. The distribution of the production and

world income is also part of the discussions of the economics. In this branch of

economics we study monetary policy, fiscal policy, international trade etc.

C) Study of Economic System:

On the basis of ownership and controlling mechanism, there are primarily three

types of economic System:

i) Capitalism: Capitalism is a system which is based on the principle of non-

interference on the part of govt. in the market operations. The market force are

free to determine the levels of indices of the economy i.e. employment, price,

factor prices, inflation rate and rate of interest etc. There is a provision of private

ownership of the property. Private Entities has a sole aim of profit

maximization.

ii) Socialism: Socialism is a system which is based on the principle of full

control on the part of govt. in the market operations. The market force are under

control of govt. and determine the levels of indices of the economy i.e.

employment, price, factor prices, inflation rate and rate of interest etc. are

decided by the govt. There is no a provision of private ownership of the

property. The sole aim of economic activities is the social welfare of the people.

Normally, Socialist economy is a planned economy and work in a planned

manner to achieve the aim of equality based welfare state.

iii) Mixed Economy:

This is the system in which few highly important areas of operation are under

govt. control and other areas are managed by private entities. This is the realist

form of economy in the world. India is a concrete example of this. In India,

alcohol, ammunition, explosives, nuclear weapon, and defence related arms are

under govt. control, all other sectors of the economy are open for private sector.

In this form of economy there is a provision of private property as well .

B) NATURE OF ECONOMICS:

Nature of body of knowledge implies whether it is science or art, or both science

and art. The study of the nature of Economics also reveals that it is a positive as

well as normative science and Pure as well as applied art.

Nature of Economics

SCIENCE ART

POSITIVE NORMATIVE PURE APPLIED


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Fig: 2.7: The Nature of Economics

(i) Economics as a Science:

There are different views of various economist that whether economics is a

science or not? According to some scholars, economics is not a science because

the laws of economics are not universal and definite as those of the natural

sciences like Physics, Chemistry etc. Contrary to it, Robbins, Friedman, etc.

economists think that it is a social science. A social science studies various

human activities. Therefore, it is not necessary for its laws to be universal and

definite. Before reaching a definite conclusion regarding Economic as a science

or an art, let us first know what science is?

Meaning of Science:

Science is the systematic body of knowledge in which scientific laws are

applied. Systematic study is that study in which those main facts about subject

are studied that are interdependent. Scientific laws are those laws which show

the relationship between the causes and effects of an event. In Economics,

economic activities of man are systematically studied.

Features of Economics as a Social Science:

(1) Systematic Study: Economics is the only subject in which systematically

studies about wealth and its relationship with interdependent activities, such as,

consumption, production, exchange, corruption, Inflation, Black Marketing etc.

is done.

(2) Scientific Law: Laws of Economics, like the law of demand, law supply,

etc., are scientific laws. These laws establish relationship between cause and

effect of an economic event. Law of Demand describes that increase in price of

a commodity (e.g. Rasgula) will result in decrease of its demand. Thus, this law

establishes the relationship between the change in price (causes) and the

resultant change in demand (effects).

(3) Validity of the Laws:

Every science keeps on verifying the traits of validity of its laws. Validity of the

laws can be verified in two ways: (a) a law applies on the real events, it will be

considered valid. (b) If a prediction based on a law, comes true, that law will

also be considered valid. More laws of Economics, such as, law of diminishing

returns, law of diminishing marginal utility, are considered valid because they

apply to the real event. Law of multiplier effect and Cash Reserve Ration(CRR)

Theory are also valid because we can predict on the basis of these laws about

future economic phenomena.

4) Universal Laws: Every pure Science Laws’ have Universal nature and they

are applicable in every country in every condition with/without any assumption.


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The laws of economics are also applicable with few assumption in every

country. Due to this reason economics is known as Science of Assumptions. The

discussion above proves that Economics is a social science. In it systematic

study of the economic activities of people is made on the basis of scientific laws.

(ii) Economics as a Positive or Normative Science:

Another question regarding the nature of Economics is: when Economics

is only a positive science or a normative science, too. Economics differ on this

point. According to Robbins, Friedman, etc., Economic only a positive science.

As against it, according to Marshall, Pigou, Economics is both a positive and a

normative science.

(a) Economics is a Positive Science: A positive science is that science in

which the exact and real state of a subject is studied. Its study shows that what

the facts of a subject are? What the facts were? and what these would be? For

instance, the study of Economics shows that what was the GDP growth rate in

2014? What is the growth rate in 2018? What it would be in 2020? All these

things are real. A positive science does not give any kind of suggestion

regarding the facts. Its study does not show what the measure of acts should be

taken to improve the present situation.

According to Lord Robbins, if Economics remains only a positive science,

there will be many benefits from it, such as:

The following statements can ensure economics as a positive science, such as;

(i) Logically based:

The ideas of economics are based on absolute logical clarifications and

moreover, it develops relationship between cause and effect. Positive science is

based on logic, which make it more exact. The logic based economic predictions

will always be true to greater extent.

(ii) Labour Specialisation:

Labour law is an important topic of economics. It is based on the law of

specialisation of labour. Economists must concern with the causes and effects of

labour-division.

(iii) More Efficient:

By adopting the logic of specialisation to achieve the aim of efficiency of

economic resources. This will help to best utlise the scarce resources of the

economy, which is ultimate aim of the Economics.

(iv) Not Neutral:

Economics is not a neutral between positive and normative sciences. According

to most economists, economics is merely positive science rather than normative

science.

(v) More Uniform:


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Being the science of logic there is greater possibilities of agreements and

consensus about means, measures and methods to solve the various economics

problem.

(b) Economics is also a Normative Science:

Many economist like Marshall, Pigou, etc., think that economics of also

Normative Science. A normative science is that science the study of which

relates to: what ought to be? Its objective is to determine the norms or aims.

This science also offers suggestions for solving the problems. For example, as a

normative science, Economics will offer several kinds of suggestions to improve

or control the inflation rate in the economy, development of the country,

stability in prices, full employment, and equitable distribution of income etc.

Economics does not deal only with the study of facts; rather it also determines

the economic aims. Following arguments can be given in favour of Economics

as a Normative science: The following statements can ensure economics as a

normative science, such as,

(i) Being Emotional More Practical:

A rational human being has not only logical view but also has sentimental

attachments and emotional views regarding problem of poverty, population

explosion, unemployment. These emotional attachments are all coming under

normative statements. Hence, economics is a normative science.

(ii) More Useful by Promoting Welfare Activity:

Economics is a science of human welfare. All the economists has forwarded

their theories for the development of standard of living of human being and

maximisation of welfare of the society as whole. Hence, all the economic

statements have their respective normative views.

(iii) More Economical through Economic Planning:

Economic planning is one of the main instruments of economic development.

Several economists have given their personal views for the successful

implementation of economic plan to make sure that benefit of every new plan

will reach to the last person of the queue. If the economists synchronise the

analysis of the economic problems with the concrete economics planning and

policy, we could save time, energy, wealth, efforts and resources. Hence,

economics is coming under normative science.

(iv): More Realistic approach of Planning:

Economic planning is one of the main instruments of economic development

and growth of the economy. The aim of the study of economics is to achieve the

aims of economic welfare, social welfare, equality based society through the

economic planning. Hence, the study of these issues has made it normative

science.


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All these lead us to the conclusion that ‘Economics’ is both positive and

normative science. It does not only tell us why certain things happen however, it

also gives idea whether it is right thing to happen.

(II) ECONOMICS AS AN ART:

Economics differ in this regards too. Т.К. Mehta said, ‘Knowledge is science,

action is art.’

According to Walras and Robbins, etc., Economics is not an “art”. Contrary to

it, Pigou which hold that Economics is not only a science, but an art also. In

order to take a decision in this regard, it is essential to know what an art is?

Art is the practical application of knowledge for achieving particular goals.

Science gives us principles of any discipline however, art turns all these

principles into reality. Therefore, considering the activities in economics, it can

claimed as an art also, because it gives guidance to the solutions of all the

economic problem

Art is the practical application of knowledge for achieving some definite aim.

“An Art is a system of rules for the attainment of given end.” J.M.Keynes.

Meanings of an “Art” can be made clear with the help of an example. We all

know that unemployment is prevalent in India. This information is obtained

from the positive science. We also know that the government has aimed at

removing the unemployment and attaining the state of full employment. This

information is supplied by the normative science. In order to achieve the end of

full employment, the government pursues appropriate monetary and fiscal

policies, and takes resources helps of economic planning etc. The study of the

policies followed by the government for attaining a specific end will be called

an “art”. As an art, Economics also determines the policies for the attainment of

economic ends (objectives). J.M. Keynes has used the term, Applied

Economics instead of Art. Modern economists use the term, “Economic

Policy” for “Art”. As an art, Economics proves helpful in solving our

practical problems.

In short, Chapman has rightly averred about the nature of Economics that

Economics is a positive science which is related to the state of the economic

facts; it is a normative science which inquires about what type of facts ought to

be there, and it is an Art which seeks to find those ways and means by which the

desired objectives (ends) could be achieved.

III) LIMITATIONS OF ECONOMICS

In order to know the extant of the scope of Economics, it is essential to

know about the limitations of Economics. Major limitations of Economics are

following:


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1) Study of Human Actions only: In Economics, only the human actions are

studied. It does not study the actions of birds, animals or inanimate things.

2) Study of Social Man: Difference of opinions exists among the economists

about, whether Economics should study the activities of one those people who

live in society, or should it study the economic activities of hermit too?

According to Dr. Marshall, “Only the social man should be studied in

Economics.”

Lord Robbins hold the view that, “The actions of all people should be studied

in Economics.”

3) Study of Real Man: The economics should only study the activities of real

man only. Under it, the activities of an economic man should not studied. The

concept of the economic man was given by the classical economists. Economic

man is that which acts only for his own selfish ends.

4) Study of Average Man: In Economics, a study of average man is made.

Under it, activities of the abnormal persons like mad persons, monk. master

criminals and mentally upset person should not studied.

5) Study of Economic Activities: In Economics, only those activities of

man should be studied which are related to generation and allocation of scarces

means or wealth.

6) Social Science: Economics is a social science. Economics is both

positive and normative science as well as an art.

7) Economic Law: The laws of Economics are scientific laws but these

laws are less definite than those of the natural sciences, because these are

implementable to human being and deal with human psychology, which is less

controlable .

In short, Boulding has rightly observed regarding the limitations of

Economics that “The subjects which are included in Economics at a given time,

may not possibly be its limits at some other time”. In order sense Economics is a

developing science.

QUESTIONS

I. Very Short Answer Type Question:

(i) Subject matter of Economics

(ii) Nature of Economics

(iii) Limitations of Economics

(iv) Micro and Macro Economics

(v) Economic Systems


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(vi) Economics as a Science

(vii) Economics as an Art

(vii) Economics as a positive science

(viii) Economics as a normative science.

II. Short Answer Type Questions

1. Define scope of Economics?

2. Describe the subject matter of Economics in detail.

3. What is meant by economic activities?

4. Discuss the nature of economics in detail.

6. Describe briefly the limitations of Economics.

.

III Long Answer Type Questions

1. Discuss the scope of Economics in detail.

2. Discuss in detail the subject matter of Economics.

3. Discuss the Nature of the Economics in detail.

4. Discuss the Limitation of economics in Detail.


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References:

J.M. Keynes( 1932)“Scope and Method of Political Economy”,p-3.

Professor L. Robbins(1932), “Essay on the nature and Significance of

economics Science.” London, p-15.

Ahuja, H.L( 2004, Revised Ed.), “Advanced Economic Theory: Micro

Economic Analysis” New Delhi: S. Chand & Company

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