Nature and Scope of Economics
What is Economics?
Economists have attempted to define economics and explain its subject matter. The list of economists who have at one time or the other defined economics includes Adam Smith, John Stuart Mill, Alfred Marshall, A.C. Pigou and Lionel Robbins. Many of those definitions were too narrow and did not capture the essence of the subject.
Study of wealth and material welfare
Adam Smith (Scottish), defined economics in terms of wealth. In his book that was written in 1776, he referred to economics as “an inquiry into the nature and causes of the wealth of nations“. Resource or asset that is accumulated to produce income is known as wealth. Wealth could be natural (e.g. crude oil, land, gold, diamond), manufactured (machine, equipment) or human (workforce). A nation with immense wealth is capable of growing its output and generating income from selling surplus products to other countries.
Alfred Marshall (1842-1924) defined it as “the study of mankind in the ordinary business of life“. He believed that economics is concerned about how material welfare is produced and distributed to the people. In other words, the wealth generated by the economy has to be applied to enhance the well-being of the people.
Science of scarcity
Professor Lionel Robbins in 1932 defined economics as “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses“. This is a generally accepted definition because scarcity is a central issue in all societies. Individuals, firms and governments make attempts to meet infinite wants (ends) from finite resources (scarce means). Choices have to be made because endless wants are vying for scarce resources.
Economics is a social science that is concerned with the utilisation and distribution of scarce resources in order to satisfy unlimited human wants.
Why economics is a science
Science is an organised body of knowledge derived from observation, formulation of hypotheses and experimentation, e.g. physics, chemistry, etc. Before a law or theory is formulated in science, certain steps have to be followed. These are the scientific methods. The steps include observation, formulation of hypothesis, experimentation, formulation of theories and laws.
Economics is a science since it uses scientific methods. Observations are first made using the senses. Then questions are asked which leads to the formation of hypotheses. Hypotheses are statements that can be tested. The economist accepts the hypotheses if they have been proven to be true from the tests carried out. Otherwise, they are rejected or modified. The results of the economic enquiry can be generalised and they become theories or laws such as the theory of consumer behaviour or the law of demand.
Why economics is not a science
Economics is different from natural science like physics and chemistry. While the natural sciences study the natural world economics studies human behaviour. In fact, economics belongs to a group of sciences called social sciences. Social sciences study human behaviours and societal relationships, e.g. sociology, psychology, anthropology, etc.
In addition, economists cannot conduct controlled scientific experiments; rather, economists construct models, gather data and forecast economic behaviour. There is no confinement to a defined laboratory; the human society as a whole could be regarded as the laboratory of the economist.
Natural sciences have some level of accuracy that is absent in social sciences like economics. The human behaviour studied in economics is complicated and changes constantly. The economic behaviours of economic agents are difficult to predict because they are based on circumstances.
Microeconomics and macroeconomics
Economics can be divided into microeconomics and microeconomics. The study of the smaller units or parts of the economy such as individual households, firms, or a government is referred to as microeconomics. For example, when you analyse the expenditure of a particular household, the price of a particular product and the demand for raw materials by a particular firm, you are studying microeconomics because they pertain to individual units of the larger economy. The Nigerian economy, for instance, comprises millions of households, millions of products and millions of firms.
Macroeconomics is the study of issues affecting the entire economy. Topics in macroeconomics include a rise in the general price level of products, unemployment, total economic output, total demand (aggregate demand) and total supply (aggregate supply). These have to do with the totality of the economy, not just an individual unit. A rise in the general price level, as an example, concerns all products in the economy, not just a single product.
Positive economics and normative economics
Economics as a positive science is concerned with “what was”, “what is” and “what will be”. In other words, it studies actual phenomena and provides valid conclusions based on facts or available evidence. Economists test hypotheses for validity which leads to their acceptance as truths or rejection as falsities. This is what makes economics similar to the pure or natural sciences which maintain objectivity.
Economics can also be regarded as normative science; economists can appraise economic issues or policies using moral or ethical principles. They often state what “ought to” or “should” be the course of action to be taken, thereby bringing in their value judgements or opinions. Opinions differ and it is difficult to say whether they are true or false. This brings in subjectivity which is peculiar to social sciences. An example is when an economist says, “the government should ban the sale of alcohol”. He is giving his opinion from an ethical/ moral perspective. The validity of this judgement cannot be ascertained as it can generate a lot of controversies; some people may have a different opinion based on the benefits accruing to the production of alcohol such as tax revenue or job creation.