Definition of Economics•The word Economics is derived from the two Greek words “Oikos” – a house and “Nomos” – custom or law to manage. Meaning “managing a household”•Economics is the study of how society manages its scarce resources
DefinitionsAdam smith (1723 - 1790)- Father of Economics•Book “An Inquiry into Nature and Causes of Wealth of Nations” (1776) •Defined, “economics is the study of wealth” – “the practical science of production and distribution of wealth”•In this definition wealth is given the first place and man is given the second place
Meaning of wealth•Around the industrial revolution, merchants were the most powerful class in Western Europe, and wealth for them meant money only. Since money at that time was in the shape of gold, merchants declared gold as the only wealth,•This definition rendered merchants as the only productive class, as they created it by trade•Adam Smith as spokesman of the emerging class widened the definition to include all material goods,•Activities which did not result in material goods production were unproductive.
Causes of wealth of nationsi)Human beings are born selfishii)They have self interest, iii)It is not the benevolence but self interest which guides economic activity iv)So each individual would maximize his self interest (income/wealth),v)When all the adult citizens of a nation maximize their self interest, the wealth of nation would grow the fastest,vi)So the mercantilists or anybody else should not impose restriction on the freedom of individuals,
Exceptions (Criticism)•While an invisible hand guides societies which rely on self interest, there are certain exceptions where it does not work. These are:▫Defense▫Public utilities▫Law order and justice•Adam Smith’s prophesy that self interest would be beneficial to all did not materialise after the industrial revolution,•The revolution divided the society between haves and have-nots, including unemployed•Criticism turned reformist and revolutionary,•Marshall attempted to offer a compromise and a new definition:
Science of welfareAlfred Marshall (1842 - 1924) wrote a book “Principles of Economics” (1890) “Political Economy” or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action