Definitions of Economics

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Definitions of Economics
One of the earliest and most famous definitions of economics was that of Thomas Carlyle, who in the early 19th century termed it the "dismal science." According to a much-repeated (but erroneous) story, what Carlyle had noticed was the anti-utopian implications of economics. Many utopians, people who believe that a society of abundance without conflict is possible, believe that good results come from good motives and good motives lead to good results. Economists have always disputed this, and it was to the forceful statement of this disagreement by early economists such as Thomas Malthus and David Ricardo that Carlyle supposedly reacted.

Another early definition, one which is perhaps more useful, is that of English economist W. Stanley Jevons who, in the late 19th century, wrote that economics was "the mechanics of utility and self interest." One can think of economics as the social science that explores the results of people acting on the basis of self-interest. There is more to man than self-interest, and the other social sciences--such as psychology, sociology, anthropology, and political science--attempt to tell us about those other dimensions of man. As you read further into these pages, you will see that the assumption of self-interest, that a person tries to do the best for himself with what he has, underlies virtually all of economic theory.

At the turn of the century, Alfred Marshall's Principles of Economics was the most influential textbook in economics. Marshall defined economics as

"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. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man."
Many other books of the period included in their definitions something about the "study of exchange and production." Definitions of this sort emphasize that the topics with which economics is most closely identified concern those processes involved in meeting man's material needs. Economists today do not use these definitions because the boundaries of economics have expanded since Marshall. Economists do more than study exchange and production, though exchange remains at the heart of economics.

Most contemporary definitions of economics involve the notions of choice and scarcity. Perhaps the earliest of these is by Lionell Robbins in 1935: "Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses." Virtually all textbooks have definitions that are derived from this definition. Though the exact wording differs from author to author, the standard definition is something like this:

"Economics is the social science that examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants."
Scarcity and Choice
Scarcity means that people want more than is available. Scarcity limits us both as individuals and as a society. As individuals, limited income (and time and ability) keep us from doing and having all that we might like. As a society, limited resources (such as manpower, machinery, and natural resources) fix a maximum on the amount of goods and services that can be produced.

Scarcity requires choice. People must choose which of their desires they will satisfy and which they will leave unsatisfied. When we, either as individuals or as a society, choose more of something, scarcity forces us to take less of something else. Economics is sometimes called the study of scarcity because economic activity would not exist if scarcity did not force people to make choices.

When there is scarcity and choice, there are costs. The cost of any choice is the option or options that a person gives up. For example, if you gave up the option of playing a computer game to read this text, the cost of reading this text is the enjoyment you would have received playing the game. Most of economics is based on the simple idea that people make choices by comparing the benefits of option A with the benefits of option B (and all other options that are available) and choosing the one with the highest benefit. Alternatively, one can view the cost of choosing option A as the sacrifice involved in rejecting option B, and then say that one chooses option A when the benefits of A outweigh the costs of choosing A (which are the benefits one loses when one rejects option B).

The widespread use of definitions emphasizing choice and scarcity shows that economists believe that these definitions focus on a central and basic part of the subject. This emphasis on choice represents a relatively recent insight into what economics is all about; the notion of choice is not stressed in older definitions of economics. Sometimes, this insight yields rather clever definitions, as in James Buchanan's observation that an economist is one who disagrees with the statement that whatever is worth doing is worth doing well. What Buchanan is noting is that time is scarce because it is limited and there are many things one can do with one's time. If one wants to do all things well, one must devote considerable time to each, and thus must sacrifice other things one could do. Sometimes, it is wise to choose to do some things poorly so that one has more time for other things.

Positive and Normative
Economists make a distinction between positive and normative that closely parallels Popper's line of demarcation, but which is far older. David Hume explained it well in 1739, and Machiavelli used it two centuries earlier, in 1515. A positive statement is a statement about what is and that contains no indication of approval or disapproval. Notice that a positive statement can be wrong. "The moon is made of green cheese" is incorrect, but it is a positive statement because it is a statement about what exists.

A normative statement expresses a judgment about whether a situation is desirable or undesirable. "The world would be a better place if the moon were made of green cheese" is a normative statement because it expresses a judgment about what ought to be. Notice that there is no way of disproving this statement. If you disagree with it, you have no sure way of convincing someone who believes the statement that he is wrong.

Economists have found the positive-normative distinction useful because it helps people with very different views about what is desirable to communicate with each other. Libertarians and socialists, Christians and atheists may have very different ideas about what is desirable. When they disagree, they can try to learn whether their disagreement stems from different normative views or from different positive views. If their disagreement is on normative grounds, they know that their disagreement lies outside the realm of economics, so economic theory and evidence will not bring them together. However, if their disagreement is on positive grounds, then further discussion, study, and testing may bring them closer together.

Economists can confine themselves to positive statements, but few are willing to do so because such confinement limits what they can say about issues of government policy. Both positive and normative statements must be combined to make a policy statement. One must make a judgment about what goals are desirable (the normative part), and decide on a way of attaining those goals (the positive part). Economists often see cases in which people propose courses of action that will never get them to their intended results. If economists limit themselves to evaluating whether or not proposed actions will achieve intended results, they confine themselves to positive analysis. (You should realize that although economists can speak with special authority on positive issues, even the best can be wrong.) However, virtually all economists prefer a wider role in policy analysis, and include normative judgments as well. On normative issues economists cannot speak with special expertise. Put somewhat differently, addressing most normative issues ultimately depends on how one answers the following question: "What is the meaning of life?" One does not study economics to answer this question.

Most statements are not easily categorized as purely positive or purely normative. Rather, they are like tips of an iceberg, with many invisible assumptions hiding below the surface. Suppose, for example, someone says, "The minimum wage is a bad law." Behind that simple statement are assumptions about how to judge whether a law is good or bad (or normative statements) and also beliefs about what the actual effects of the minimum wage law are (or positive statements).