WORLD FAMOUS ECONOMISTS AND THEIR CONTRIBUTIONS - ADAM SMITH

WORLD FAMOUS ECONOMISTS AND THEIR CONTRIBUTIONS

            ADAM SMITH

            (1723 – 1790)

·        Father of Modern Economics

·         He was a Scottish economist, philosopher, and author

·         A moral philosopher, a pioneer of political economy, he was a key figure during the Scottish Enlightenment era

·         He is best known for two classic works:

1.    The Theory of Moral Sentiments (1759), and

2.  An Inquiry into the Nature and Causes of the Wealth of Nations (1776)

• The latter, usually abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics
•  “The great object of the Political Economy of every country is to increase the riches and power of that country.” 
• The phrase invisible hand was introduced by Adam Smith in his book 'The Wealth of Nations'. He assumed that an economy can work well in a free market scenario where everyone will work for his/her own interest

SOME OF HIS FAMOUS QUOTES

“No society can surely be flourishing and happy of which by far the greater part of the numbers are poor and miserable. ”

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.”

“Man is an animal that makes bargains: no other animal does this - no dog exchanges bones with another.”

“Individual Ambition Serves the Common Good.”

MAJOR ECONOMIC PROBLEMS

The various schools of thought on Economics and its subject matter focus mainly on the following:

•          The means at our disposal are scarce
•         There is a multiplicity of wants that we seek to achieve
•          The consumer needs to get maximum satisfaction
•          The producer wants to maximize output or profit

Thus in the words of Henry Smith, A Prospect of Political Economy (1968)

“In view of the scarcity of means at our disposal and the multiplicity of ends we seek to achieve, the economic problem lies in making the best possible use of our resources so as to get maximum satisfaction in the case of a consumer and maximum output or profit for a producer. Hence the economic problem consists in making decisions regarding the ends to be pursued and the goods to be produced and the means to be used for the achievement of certain ends.”

FUNDAMENTAL PROBLEMS FACING AN ECONOMY

Let us examine each of these problems in detail:

GROWTH DEFINITION

Paul Anthony Samuelson is called as “Father of Modern Economics”. He pioneered the inclusion of mathematics with the theories of economics. Before him, economics was taught based on verbal explanations and vague derivations. He introduced the language of mathematics to validate its theories and principles which justified economics as a science accommodating both logic and rationality.

He was an American economist and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize in 1970, that he "has done more than any other contemporary economist to raise the level of scientific analysis in economic theory".

He defines Economics as, “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future amongst various people and groups of society. It analyses costs and benefits of improving patterns of resource allocation”.

The main highlights of the growth definition are:

•         The main focus in this definition is on Choices under Scarcity and Growth

•         This definition is a combination of the Wealth, Welfare and Scarcity definitions

•         The resources are not only scarce but there is a need for Efficient Allocation of those scarce resources

•         There is an introduction to the element of Time

•         As these resources have alternative uses there exists a problem of Choice

Thus this definition does not restrict itself to material well-being or money but also takes into consideration future growth over time.

The other growth related definitions are given by:

In the words of Frederic Benham Economics is “a study of the factors affecting the size, distribution and stability of a country’s national income.”

C. E. Ferguson has defined Economics in these terms: “Economics is the study of the economic allocation of scarce physical and human means (resources) among competing ends, an allocation that achieves stipulated objectives by way of optimizing or maximizing.”

According to Prof J K Mehta “a science which studies human behaviour as a means to the end of want lessness” In other words “economics is, the science that studies human behaviour as the effort to minimize pain in the long run, or, as an endeavour to gain freedom from wants and reach the state of happiness.

SCARCITY DEFINITION

·         Lionel Robbins was highly critical of the definition of economics given by Alfred Marshall

·         In his book “Nature and Significance of Economic Science”  published in 1931 he challenged the traditional view of the nature of economic science

·         Robbins has defined Economics thus: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”

·         An analysis of his definition brings to the fore the following three fundamental propositions which form the basis of the structure of economic science:

1.    Ends: refer to human wants which are unlimited. That is why Economics is also called a Science of Choice

2.    Means are limited: The resources that can be used to satisfy wants or ends are limited. Had they been unlimited there would not have arisen any economic problem. The resources are scarce and therefore they have to be economized. The use of the term Scarce is in the relative sense and not in the Absolute sense.

3.    Resources have Alternative Uses: The resources available for use have alternative uses as the same resources can be used for different uses.

4.    Varying Degree of Urgency: The alternative uses are of varying importance and change with time

The other definitions of scarcity as are given by

·         Tibor de Scitovsky defines it as - Economics is the science concerned with the administration of scarce resources

·         In the words of George Stigler, “Economics is the study of the principles governing the allocation of scarce means among competing ends when the objective of allocation is to maximize the attainment of the ends”

·         According to Stonier & Hague - Economics is the fundamentally a study of scarcity and the problem which gives rise.

·         Harvey - Economics is the study of how men allocate their resources to provide for their wants.

WELFARE DEFINITION OR NEO - CLASSICAL ECONOMICS

·         For a long time the main focus of Economics centered around Wealth for the sake of material welfare. This emphasis later shifted from Wealth to Man and his welfare

·         The major proponent of this definition has been Alfred Marshall along with other economists like Beveridge, Cannon, and Pigou

·         In the words of Marshall, "man earns money to get material welfare."Marshall rightly puts it “Economics is on the one side  a study of wealth; and on the other, and more important side, a part of the study of man”

·         Marshall says “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 well-being”

·         The main emphasis of Marshall’s definition lays on the following four points:

1.    The primary focus is Welfare and wealth is secondary ie Wealth is sought for promoting human welfare and it is not regarded as the be all and end all of economic activities

2.    Economics is concerned with the common man ie a man who is influenced by feelings and emotions and not by one whose only motive is to acquire wealth

3.   Economics is a social science and does not consider humans in isolation. Thus he influences and is being influenced by society

4.    Economics has a materialistic aspect and it ignores non materialistic aspects

·         According to Beveridge “Economics is the study of the general methods by which men cooperate to meet their material needs”

·         Cannan is of the opinion that “The aim of Political Economy is the explanation of the general causes on which the material welfare of human beings depends”

·         Pigou states “The range of our inquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money”

Let us examine each of these definitions in detail to understand the concept better:

WEALTH ECONOMICS OR CLASSICAL ECONOMICS:

• This school of economic thought originated during the late 18th and early 19th century
• The main proponent of this definition is Adam Smith also known as the ‘Father of Modern Economics’ and other Classical Economists like David Ricardo, Jean – Baptiste Say, John Stuart Mill, Thomas Malthus etc
•   According to Adam Smith Economics is concerned with An Enquiry Into Nature And Causes Of Wealth Of Nations
•  Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics. The fundamental message in Smith's influential book was that the wealth of nations was based not on gold but on trade: That when two parties freely agree to exchange things of value, because both see a profit in the exchange, total wealth increases.
•  Classical economic theory is rooted in the concept of a laissez-faire economic market. A laissez-faire--also known as free--market requires little to no government intervention. (French phrase "laissez-faire," or "let it be.")
• This School of economic thought stresses that economies function most efficiently if everyone is allowed to pursue his or her self interest, in an environment of free and open competition
• This ensures economic resources are allocated according to the desires of individuals and businesses in the marketplace
• The fundamental principle of the classical theory is that the economy is self‐regulating when free of coercion. Adam Smith referred to this as a metaphorical "invisible hand", which refers to the notion that private incentives are aligned with society welfare maximization under certain competitive conditions.
• ·The phrase invisible hand was introduced by Adam Smith in his book 'The Wealth of Nations'. He assumed that an economy can work well in a free market scenario where everyone will work for his/her own interest
• The invisible hand refers to an unseen mechanism that maintains equilibrium between the supply and demand of resources
• J E Cairnes in his book, “The Character and Logical Method of Political Economy” said Economics deals with the phenomenon of wealth
• French economist J.B. Say  - Economics is science which treats of wealth
• The American Economist, F.A Walker is of the view that Economics is that body of knowledge which relates to wealth

In all these definitions, key position is assigned to WEALTH

DEFINITIONS OF ECONOMICS

The famous Swedish economist Gunnar Myrdal has said, “Economics is the only term regarding the precise definition of which the economist need not be concerned” But for a student it is very important to have a basic understanding of the term so as to get a clear understanding of the subject matter.

This definition of Economics under various schools of thought as under:

Introduction to Economics

ECONOMICS MADE EASY FOR STUDENTS

INTRODUCTION TO ECONOMICS

The simplest meaning of the word economics is:

·         The branch of knowledge concerned with the production, consumption, and transfer of wealth

·         The condition of a region or group as regards material prosperity

·         A social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services

The last meaning says that it is a social science which brings us to the point that Economics is a branch of Science albeit Social Science.

Science is defined as the intellectual and practical activity encompassing the systematic study of the structure and behaviour of the physical and natural world through observation and experiment.

The branches of science (also referred to as "sciences", "scientific fields", or "scientific disciplines") are commonly divided into three major groups:

• Natural sciences: the study of natural phenomena (including cosmological, geological, chemical, and biological factors of the universe) Eg Physics, Chemistry, Biology, Earth Sciences, Oceanography, Astronomy etc

• Formal sciences: the study of mathematics and logic, which use an a priori, (as opposed to factual, methodology) eg Engineering and its branches like Electrical, Computer , Information Technology etc

• Social sciences: the study of human behavior and society eg Sociology, Politics, Economics, Anthropology, Demographics, Human Geography, Archaeology etc

Thus Economics as a Social Science is the study of social behaviour guiding in the allocation of scarce resources to meet the unlimited needs and desires of the individual members of a given society.

Social science tells us about the world beyond our immediate experience, and can help explain how our own society works - from the causes of unemployment or what helps economic growth, to how and why people vote, or what makes people happy. It provides vital information for governments and policymakers, local authorities, non-governmental organisations and others.