Definition of Economics

According to Adam Smith “Economics” is the science of wealth. However, this definition was a little too materialistic as wealth can be a means to an end; it cannot be an end in itself.

The welfare definition of economics was attempted by Alfred Marshall, a pioneer neoclassical economist, to redefine his field of study. This definition expands the field of economic science to a larger study of humanity. Specifically, Marshall’s view is that economics studies all the actions that people take in order to achieve economic welfare. In his Principles of Economics Marshall writes, “Political economy or economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. In the words of Marshall, “man earns money to collect wealth and spends those earnings to get maximum satisfaction.” Marshal was criticized to have narrowed down the definition and scope of economics. Marshall distinguishes between material and non-material welfare, and confines economics to the study of material welfare. Robbins feels that economists should not limit their attention to material welfare. There are things that are “non-material” but they promote human welfare. Robbins cites “the services of doctors, lawyers, teachers, dancers, engineers, professors”. These goods “satisfy our wants and are scarce in supply”. Some economists feel that Marshall’s definition of “material” includes both goods and services, and that Robbins is either misreading Marshall’s text, or creating a straw man argument.

Prof. Lionel Robbins contributed scarcity definition of economics. He said, . “Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” Firstly, there are three parts of the definition. Human wants are unlimited in number. Secondly, human wants are unlimited but resources or means to satisfy them are limited. The means refer to goods and services which we use to satisfy our wants. They are material and non- material goods like time, money, services, resources etc. These resources are scarce. Thirdly, all the scarce means can be used in more than one purpose. In other words, they can be used in several purposes. For instance, land is very scarce, but land can be used for construction of buildings, cultivation, or industrial plant or swimming pool and water games. In fact all these economic resources can be used for various purposes. Thus, in reality goods can be put to alternative uses of varying importance. The main problem of economics is how to satisfy the unlimited wants with limited means which have alternative uses. Robbins describes this problem as the problem of economising scarce means. In other words, it is the choice of making of an economic activity. According to Cassel, “Economics is the science of Scarcity.” Economics is thus a study of certain kind of economics that is economising the resources. The problem of economising resources leads to the problem of choice.

 The above three definitions of economics are not a substitute of each other; rather they are complementary in a holistic study of economics.

Microeconomics: In economics, the study of units is called microeconomics. For example when we study about an individual’s consumption, a firm’s production and price decisions or price of a factor of production (land, labour, capital, entrepreneurship) , these constitute microeconomics. In microeconomics the major part of study pertains to consumer and producer’s behavior, price theory pertaining to economic commodities as well as factors of production. Therefore it is often referred as “price theory”.

Macroeconomics: In economics the study of aggregates is called macro economics. The major part of macroeconomic study pertains to income, output, employment (economic growth) and inflation. It is also referred to as “general theory”.

Relation between microeconomics and macroeconomics: It depends on our choice of framework which puts economic concepts in the category of microeconomics and macroeconomics. If we select national product as our macro reference, then its constituents such as primary sector, secondary sector and tertiary sector are treated as microeconomic subjects. However, if we select industrial sector as our macro reference then manufacturing, electricity and mining are treated as micro constituents of the same. According to Lucas, much of modern macroeconomic theory has been built upon ‘microfoundations’—i.e. based upon basic assumptions about micro-level behavior. For example, microeconomics also deals with the effects of national economic policies (such as changing taxation levels) on the aforementioned aspects of the economy.

Positive economics: It studies economic phenomena and activities as they are without setting any normative criteria. It studies “what is”,

Normative economics: It studies economic phenomena and activities in the light of normative standards. It studies “what should be”.

Economic system: Economic system refers to the manner and the way in which production, consumption and distribution is organized. Capitalism, socialism, mixed economics etc. are different variants of economic system.


Capitalism is an economic system based upon private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. In a capitalist market economy, decision-making and investment are determined by every owner of wealth, property or production ability in financial and capital markets, whereas prices and the distribution of goods and services are mainly determined by competition in goods and services markets. Laissez Faire (a free or non-interventionist system where decisions are taken freely by producers and consumers) and price system operated through the invisible forces of market (demand and supply) are the hallmarks of a capitalist system. Such a system is prevalent in Western Europe and North America.


Socialism is a political and economic system characterised by social ownership and democratic control of the means of production rather than the capital owners. Social ownership may refer to forms of public, collective or cooperative ownership, or to citizen ownership of equity. There are many varieties of socialism and there is no single definition encapsulating all of them, though social ownership is the common element shared by its various forms. Instead of Laissez Faire and decentralized planning as seen in capitalism, the socialist system has centralized planning. Contrary to price system operating through market mechanism in a capitalist system, prices are administered or government determined in socialism.

Socialist economic systems can be divided into non-market and market forms. Non-market socialism involves the substitution of factor markets and money, with engineering and technical criteria, based on calculation performed in-kind, thereby producing an economic mechanism that functions according to different economic laws from those of capitalism. Non-market socialism aims to circumvent the inefficiencies and crises traditionally associated with capital accumulation and the profit system. By contrast, market socialism retains the use of monetary prices, factor markets and in some cases the profit motive, with respect to the operation of socially owned enterprises and the allocation of capital goods between them. Profits generated by these firms would be controlled directly by the workforce of each firm, or accrue to society at large in the form of a social dividend.

Market mechanism

Market mechanism refers to interaction of demand and supply to determine price of a commodity or a factor of production. It also means exchange between sellers and buyers- barter or money-based (monetized). In an ideal interpretation of market mechanism, there is no external agency interfering while exchange between the market players takes place but only the “invisible hands of demand and supply”. In three different types of economy (i) free market economy,  (ii) command or planned economy and (iii) mixed economy market mechanism has different levels of operational space. In free market economy, all the resources are allocated by private sector (individuals, households, and groups of individuals); in planned economy, all the resources are owned by the public sector (local and central government); and, in mixed economy, the resources are owned by both private and public sector. Resources are allocated according to the forces of demand and supply, and this is known as market mechanism. It is widely believed that government interference in market mechanism leads to economic inefficiency. Former Soviet Union & East European countries, Cuba and China are examples of socialist economy. Before 991 economic reforms India was a mixed economy with a great slant towards a socialist system. France was another mixed economy with a socialist slant.

Price System

Price system is a system in which prices of commodities and factors of production are determined by interaction of invisible hands of the market, i.e., demand and supply. Prices of commodities are determined where demand equals supply. In a socialist system prices may be determined by government and such price system is called administered price system. A mixed price system involves a combination of both administered and unregulated prices.

Mixed Economy

A mixed economy is variously defined as an economic system blending elements of market economies with elements of planned economies, free markets with state interventionism, or private enterprise with public enterprise. There is not only one definition of a mixed economy, but there are two major definitions recognized for “mixed economy”. The first of these definitions refers to a mixture of markets with state interventionism, referring to capitalist market economies with strong regulatory oversight, interventionist policies and governmental provision of public services. The second definition is apolitical in nature and strictly refers to an economy containing a mixture of private enterprise with public enterprise.

Crony capitalism

Crony capitalism is a perverse type of capitalism in which nepotism, favouritism and corrupt means determine market outcomes rather than free play of market mechanism and price system which operate through the invisible hands of market that id demand and supply. It is an economy in which businesses thrive not as a result of risks they take, but rather as a return on money amassed through a nexus between a business class and the political class. This is done using state power to crush genuine competition in handing out permits, government grants, special tax breaks, or other forms of state intervention over resources where the state exercises monopolist control over public goods, for example, mining concessions for primary commodities or contracts for public works. Money is then made not merely by making a profit in the market, but through profiteering by “rent seeking” using this monopoly or oligopoly.

Market Socialism

Market socialism, also called liberal socialism, economic system representing a compromise between socialist planning and free enterprise, in which enterprises are publicly owned but production and consumption are guided by market forces rather than by government planning. A form of market socialism was adopted in Yugoslavia in the 1960s in distinction to the centrally planned socialism of the Soviet Union. A similar development occurred in Hungary during the late 1960s and early 1970s.

Market socialism is a type of economic system involving the public, cooperative or social ownership of the means of production in the framework of a market economy. Market socialism differs from non-market socialism in that the market mechanism is utilized for the allocation of capital goods and the means of production. Depending on the specific model of market socialism, profits generated by socially owned firms (i.e. net revenue not reinvested into expanding the firm) may variously be used to directly remunerate employees, accrue to society at large as the source of public finance or be distributed amongst the population in a social dividend. Market socialism is distinguished from the concept of the mixed economy because unlike the mixed economy, models of market socialism are complete and self-regulating systems. Market socialism also contrasts with social democratic policies implemented within capitalist market economies: while social democracy aims to achieve greater economic stability and equality through policy measures such as taxes, subsidies and social welfare programs, market socialism aims to achieve similar goals through changing patterns of enterprise ownership and management.

Casino Economies

A word fashionable more in journalism than economics, means economies where more speculation in share market and real estate market is taking place than actually reflected by its GDP growth or living standard. The rentiers and speculators drive the economy than real production. Casino economy refers to an economic environment which encourages investors to take large risks  in financial instruments and real estate for large profits. Such investments are not in synch with increase in income, output and employment in the economy. Financial sector grows much faster than the real sector in the casino economies and a bubble is created which sooner or later bursts.

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