THE NATURE AND PURPOSE OF ECONOMIC ACTIVITY

Definitions of economics as a social science

Economics exists because resources are limited in supply. Raw materials such as oil and coal are finite, and consumer goods such as cars and televisions are scarce. In short, you cannot have everything that you want! However, if you are reading this you probably have what you need to survive - water, food, shelter and warmth. Yet, many people in developing countries do not even have what they need. According to the United Nations, 852 million people are under-nourished. However, rich or poor, we all suffer from the main economic problem; resources are scare but human wants are infinite. Once we have food on our plate and clothes on our back we want somewhere to live, and as soon as someone gets a car they soon want a bigger or better one. If resources were unlimited we could have everything we wanted, but in a world where resources are scarce we must make choices, such as what to buy or how to spend our time. On a limited budget a family might have to choose between going on holiday or paying school fees. A billionaire might be able to buy most things but he cannot play golf and go skiing at the same time.

Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.
Lionel Robbins, An Essay on the Nature and Significance of Economic Science, 1932
Another definition is “Economics is what economists do", and John Maynard Keynes described what he thought economists do in his ‘Essays in Biography’ in 1933.

"An economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher-in-some-degree. He must understand symbols and speak in words. He must contemplate the particular in terms off the general, and touch abstract and concrete in the same flight of thought. He must study the present in light of the past for purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician".

How do economists work?

“There appear to be three methods by which economic phenomena may be investigated, and each of them has its vigorous champions. The first consists mainly in deductive analysis. Proceeding from a few simple premises based upon general observation to broad generalisations. The second is the historical method, which seeks an understanding of existing institutions by tracing their evolutions from their origins in the past. The third is statistical induction, which endeavours, by the analysis of numerical data, to develop quantitative knowledge of economic phenomena. Luckily, the disputes which have been waged between the advocates of these different types of analysis do not have to be settled before economics can be defined, for the question of definition is one of subject matter rather, than of method. Anyway, it is now coming to be recognised that these methods are complementary rather than mutually exclusive.”

(Raymond T. Bye, The Scope of Economics, Journal of Political Economy 1939)

One problem with the modern definition of economics at the start of the page is that it does not allow for a discussion of ethics. By using the term ‘scientific’ in the definition we exclude opinions, but some economists think ethics should be discussed and disagree how resources should be allocated. Some economists think an equal society, where everyone earns similar amounts, is desirable; whereas other economists believe there is nothing wrong with a society that has both poor and rich people.


The main economic question

In order to meet people’s needs and wants economists ask themselves the question; what, how and for whom should we produce?

1. What to produce?
In traditional tribal economies much effort is spent in producing food or collecting water to meet every day needs. In market economies effort is expended on providing for the same basic needs, but also on labour saving devices such as washing machines and leisure goods such as televisions, but market economies also produce seemingly useless objects such as plastic toys for putting in breakfast cereal packets. In the communist Union of Soviet Socialist Republics (USSR) during the 1930s, Joseph Stalin ordered large-scale capital projects such as steel works and dams whilst the production of consumer goods was of secondary concern. Whatever the economic system, the question, ‘what is to be produced?’ has to be answered.

2. How goods and services are to be produced?
In a traditional (subsistence) economy like that of the pygmies of Zaire, the individual works alone or with family members to provide for themselves, there is little division of labour and not much surplus production. The family or tribe consumes most of the production, and only a small part of it is available for trading. But in market economies like Britain and the USA, scarcely any worker consumes his own output; rather he sells his labour to an employer for wages, which are then spent in shops. The division of labour is much more important in market and planned economies than in traditional economies. In subsistence economies tangible goods such as clothes and food are produced. In more developed economies intangible services such as, television programmes and taxi rides are provided as well as tangible goods, many of which are made in factories using complex machinery.

3.Who to produce for?
The subsistence worker in a traditional economy produces for himself and immediate family. In planned economies such as the former USSR, production was planned by a central authority and distributed supposedly on the basis of ‘each according to their ability and each according to their needs’. Most people earned approximately the same as each other, although a powerful elite seemed to do a lot better than the average citizen. In a free market economy people who inherit wealth are favoured. If your parents aren’t wealthy then intelligence, hard work and business skill might be the path to riches – but however money is obtained the people with the most can buy more goods and services than the poor.

Some textbooks include a couple more questions:

4. Where to produce?
Most countries have specific areas where a combination of the factors of production dictates a logical place for production; e.g., shipbuilding needs to be near the sea. However, governments might overlook natural factors to help areas with high unemployment. In the European Union, development funds are directed to areas of deprivation to help build new roads or bridges and to help businesses start up.

5. When to produce?
Forsaking current enjoyment by curtailing expenditure on consumer goods today might yield greater enjoyment at a later date if investment in capital goods is made now. When governments or individuals decide to spend money on education, they do this in the hope that this will lead to greater rewards in the future.

Questions

1. Define the term ‘goods’ and give three examples.
2. Define the term ‘services’ and give three examples.
3. What are the basic human needs?
4. What is the main economic problem?
5. What is the main economic question?
6. Explain why people go to work.


Did you know -
Mick Jagger of the Rolling Stones studied economics at the London School of Economics. He left before completing his degree in order to play with the band - his professor said it was a bad move as there was no money in it. This early Stones number was obviously influenced by his studies!