UNIT | INTRODUCTION CHAPTER 1 ECONOMICS AS A SCIENCE (A) INFRODUCTION : EARLIER VIEWS OF ‘ECONOMICS’ The word ‘Economics’ was derived from the Greek words "Oekos" (a house) and "nomos" (to manage) which meant ‘managing a household’. This word retained that meaning for many centuries. The term ‘Economics’ was applied to a frugal use of one’s limited resources and the term ‘Econo.ny’ to the manner in which a particular society organised its resources for the maximum production of desired goods and services. ‘Economy’ is the title of a special work by Xenophont (430-354 BC) in which sensible rules for the management of household and estate are examined. Aristotle (384-322 BC) in his ‘Politics—Book I’ dealt with economic issues under two divisions—{i) ‘homo oeconomicus’ (science of household management) and (ii) ‘chrematistics’ (the science of supply which deals with money-making, art of acquisition, exchange, etc.) along with other social and political issues. Thus, in early days economics .vas considered as managing a household, using the limited funds available in the most economical manner possible. Kautilya’s ‘Arthasasthra’ (323 BC) deals with the management of State. Later, economics was considered as ‘Political Economy’ as it was considered a part of State craft and mixed with the social and political issues. The person who introduced the term ‘Political Economy’ in socio-economic literature was Antoine de Montchrestien, seigneur de Vasteville, a French nobleman (1575-1621). His “Traicte de l’economie Politique’ was published in 1615. Thus, political economy was regarded primarily as the science of ‘State economy’. Economics was called as ‘Politicai Economy’ till the end of 19th century. CT)2 PRINCIPLES OF ECONOMICS FOR LAW STUDENTS In England, ‘mercantilists’ like Montchrestien (1575-1621) and Thomas Mun (1571-1641) and French economists of the mid-18th century, the ‘physiocrats’ like Francois Quesnay (1694-1774) and Turgot (1727-1781) wrote on ‘Political Economy’, William Petty (1623-1687) Boisguilbert (1646-1714), Locke (1632-1704) and others wrote on Political Economy. Adam Smith (1723-1790), the Scottish economist is the representative of classical economics, J.B Say (1767-1832) jn France, Malthus (1766-1834) and David Ricardo (1772-1823) in England are also considered as classical economists. In the early part of the 19th century, to bestow new names upon economics. Whately Suggested ‘catallactics’ or the science of exchanges, Heart called it plutology’ or the science of wealth, and Ingram called it ‘chremantics’ or the science of money-making. Despite these attempts, the original name ‘Political Economy" continued to survive the early and the middle part of the 19th century. Towards the close of the 19th century there was a definite change from ‘Political Economy’ to ‘Economics’. The dropping of the word ‘political’ emphasizes that our ultimate concern is with jndividual human beings, not with ‘States.’ Modern economics deals with wealth and man. Ely describes the development of modern economics as occurring in three steps. He writes,"Writers of the first class regard political economy as a science which has to do with external valuable things or economic goods—that is with wealth; writers of second class, as the science which has to do with economic goods in their relation to man; writers of the third class, as the science which has to do with man in his relation to economic goods." _Economists like Adam Smith, Marshall, Pigou, Robbins, etc. considered economics as science and defined economics in their own way. attempts were made (B) DEFINITIONS OF ECONOMICS (1) Adam Smith’s Wealth Definition Adam Smith, the classical economist defines economics as science of wealth in his book, ‘An Enquiry into the Nature and Causes of the Wealth of Nations’. He says thus : "Political Economy, considered as a branch of science of statesman or legislator, proposes two distinct objects, first, to provide a plentiful revenue or subsistence for the people, or more properly enable them to provide such a revenue or subsistenceINTRODUCTION 3 for themselves, _ and secondly, to supply the State or Commonwealth with the revenue Sufficient for the public services, It proposes to enrich both the people and Sovereign." Ricardo, J.B. Say, Js. Mill, N.W. Senior, etc. support EO, ay » NW. , . ed Adam Smith’s definition of economics which deals ein the phenomenon of wealth. . J.B. Say, in his ‘Traite d'Economie Politique’ (1803) Says, "The aim of political economy is to show the way in which wealth is produced,distributed and consumed." JS. Mill (1805-1873) in his ‘Principles of Political Economy’ says, “Political Economy Professes to teach or investigate the nature of wealth and the laws of its Production and its distribution." Ricardo (1772-1823) in his ‘Principles of Political Economy and Taxation’ says thus : "Economist studies how the Produce of the earth is distributed." Thus, economics deals with distribution of income and wealth, Main features of the wealth definition The main Points of the wealth definition are : (1) Economics is the study of wealth only, It deals with the consumption, production, exchange and distribution of wealth. i (2) Only such material commodities constitute wealth as are scarce and useful. Non-material goods like services and free goods like air and water are not wealth. (3) Economics studies the causes of wealth changes which means economic development. To increase wealth, production of material goods will have to be increased, Expansion of production depends on division of labour. Expansion of production requires more investment and increase in demand. Investment will be maximum when there is a free economy. Criticism (1) Too much importance to wealth.—Wealth has been given the primary Place in economics. Hence, Carlyle branded €conomics as ‘pig philosophy’ because of its support to acquisition of riches. John Ruskin characterised economics as a ‘bastard Science’, the science of getting rich. Carlyle considered economics as ‘the Gospel of Mammon’. Further, economics was branded as ‘a science of bread and butter’ and a ‘dismal science’, (2) Restricted meaning of wealth—Material goods onlyPRINCIPLES OF ECONOMICS FOR LAW STupeyy ‘ i ices are not take, i . Non-material services : . are considered as wealth ae aia ee vord. ‘wealth’ a wealth. But modern oe icting the wealth to mater ey bor set eewel he scope of economics, i ee tion of man’s welfare,—This definition Gives i iin a to the economic welfare of society. It emphasize, eit aa eeranialaien of wealth. It pays no attention to equitabj, ee study of means.—This definition makes the earning of wealth an end in itself. It does not tell us the Propriety of means for earning wealth. (6) Concept of economic man.—The wealth definition ig based on the assumption that every man works more to Satisfy his self interest. It does not deal with a common man but the selfish economic man. As the wealth definition is unscientific and narrow, later economists expanded the scope of economics by giving welfare definition. (2) Marshall’s Welfare Definition Adam Smith’s definition of economics as a science of wealth was criticised as dismal science. In order to save economics from severe criticism, Marshall (1842-1924) gave a new definition of economics in his ‘Elements of Economics’. He gives more emphasis to human welfare than to wealth. Alfred Marshall says, "Political Economy or Economics is-2 study of man’s action in the ordinary business of life; it inquires how he gets his income and how he uses it. Thus it is on the one side study of wealth, and on the other and more important side a part of the study of man." Marshall in his “Economics is a study life. It examines that Pi is most closely of "Principles of Economics" says thus : of mankind in the ordinary business of art of individual and social action which connected with the attainment and with the use material requisites of well-being." AC. Pigou (1877-1959), Edwin Cannam, Sir William Beveridge, etc. supported the welfare definition. AC. Pigou in his Economic Welfare’ says, "Economics is the study of economic welfare... Economic welfare is that part % welfare which can be brought directly or indirectly into relatio" with the measuring rod of money." Edwin Cannan in his ‘Elementary Political Economy’ $4)INTRODUCTION 5 "The aim of Political Economy is the explanation of the general cause on which the material welfare of human being depends." Sir William Beveridge in his "Economics as a Liberal Education’ says, "Economics is the study of the general methods by which men co-operate to meet their material needs," Thus, Economics was a science of wealth. Now it is a ‘science of welfare’. Main features of welfare definition The welfare definition has the following main features : (1) A study of mankind.—Economics studies the economic activities of man which are concerned with the material welfare of man. (2) Ordinary business of life—An ordinary man works mostly to earn wealth and spends his earning to get maximum satisfaction out of it. Economics studies economic activities of an ordinary man. (8) Study of individual and social action.—Economics studies man not in isolation but as a member of a social group. It studies the personal and social activities of man which are concerned with his material welfare. (4) Study of material welfare.—Economics is a subject which studies the welfare of man which is of the material type. The study of non-material welfare is outside the scope of economics. Merits of the welfare definition The welfare definition has the following merits : (1) Avoids criticism made against Adam Smith.—This definition emphasises man and his welfare. Marshall gives preference to man and wealth later on. Now, economics is no more a dismal science. (2) Classifies the economic activities—Marshall’s welfare definition classifies the economic activities of man into—material welfare and non-material welfare. Further, economic actions are classified as individual and social. Thus, Marshall's definition served to put economics as a class by itself, distinguished from other sciences. (3) Clear about the nature of economics.—This definition considers economics as a social science. It is not a pure science. It is also not an art. It is one among6 PRINCIPLES OF ECONOMICS FOR LAW STUDENTS a the social sciences like politics, sociology, etc. ) Clear on the scope of economics.—The scope of economics, according to welfare definition is the material activities of man only. It is the study of individuals as well as the society as they are related through the economic activities. Criticism of welfare definition Leon Robbins criticised Marshall’s definition as under : (1) Limited scope of economics.—Marshall’s definition has limited the scope of economics to the study of t there are non-material services teacher or a lawyer which have the scope of economics should s which are economic in material goods only. But of a singer, a doctor, a economic value. Hence, include all goods and service: nature. (2) Restriction of economics to the activities of ordinary man.—Marshall’s definition _restricts economics to the study of man in the ordinary business of life. All men are faced with the problem of choice. Therefore, economics is the study of all men whether ordinary or otherwise. of welfare.—Whatever (3) Lack of a clear concept economics is concerned with, it is not concerned with the causes of material welfare as such. The idea of welfare itself is vague, uncertain and unstable. The concept of welfare changes according to time, place and circumstances. Welfare depends on the feeling of individual. (4) Welfare canno' Welfare cannot feelings of persons. Though as an instrument for the measurement of ec welfare, but it is not a satisfactory measure. No two persons get the same satisfaction with the same quantity purchased by spending equal amount 2° money. A poor man may get much more than 4 ric man. (5) Classificatory rather than analytical.—The division of human activities into ‘economic’ and ‘non-economic’ is completely unscientific and illogical. Even an economic activity has a non-economic aspect. t be quantitatively measured.— be measured as. it depends on the Prof. Pigou regards money onomicAfter criticising Marshall’s definition, Robbins gives his scarcity definition of economics. (3) Robbins’ Scarcity Definition Robbins Lionel Charless (1898—) in his ‘An Essay on the Nature and Significance of Economic Science’ (1981) criticised Marshall for his normative view of economics. Robbins defines economics thus : "Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Main Features of Robbins’ Definition (1) (2 LS (3) (4) Unlimited wants or ends.—Robbins calls wants as the ends. Those concerned with the consumption of goods and services may be called economic wants. Economic wants or ends are unlimited. It is not possible to satisfy all the wants. Wants are endless. Each of his wants may be satisfied separately. Wants are repetitive in nature. They have priority in satisfying them. Limited or scarce means.—Most of the means or resources which can be used to satisfy wants are limited in supply. We call such a resource as limited or scarce as their supply is less than their demand. Therefore, we cannot satisfy our wants fully. Means have alternative uses.—The same resource is used in more than one use. Some resources have a large number of uses. Others have a few uses. Man is always faced with the problem of allocation of limited resources. Wants are of different intensity—Some wants need immediate satisfaction, others can be postponed. A man8 PRINCIPLES OF ECONOMICS FOR LAW STUDENrs is forced to choose between wants due to their different intensity. 7 Fl (5) Neutral between ends.—Economics is neutra) between ends. Neither the ends alone nor the Means alone are of interest to the economist. An economist jg expected to be indifferent as to the ends. He cannot pass judgments on them. He is not expected to pass judgments on the most appropriate uses of the means for. reaching the ends themselves. Thus economics is free from value judgment. His real task is to indicate how the means at one’s disposal can be used to attain those ends in the best possible way. According to Robbins, the economics consists of laws of the various results of the act of choice in particular cases, maximising the achievement of ends or minimising the use of means is the general criterion on which choices are based, given the restrictions on the choices. (6) Problem of choice.—Choice is really an economic activity. If resources are in plenty and goods are free, there would be no problem of choice. As the means are scarce and at the same time they have alternative uses, the problem of choice arises. The consumer has to choose which ‘end’ he has to attend immediately. Generally, consumers have limited money, based on their income, to spend on day-to-day transactions. He has to choose whether he has to spend his money on household needs, medical care, children’s education, social expenditure such as presenting gifts to relatives and friends in functions, purchase of entertainment or luxury goods, etc. If he spends his income on particular item, he cannot get other items with his limited means. Every consumer faces the problem of choice in satisfying his wants throughout his life. The problem of allocation of resources is also concerned with the choice between the production of capital goods or consumer goods. After solving the problem of allocation of resources, 4 choice has to be made among the methods of producing goods. Then another problem arises regarding the choice of techniques, ie., labour-intensive technique or capital intensive technique. Later the choice of the scale of production arises, The problem of choosing the method of production also deals with the choice of the location of production units. Finally, the returns make the producer to choose whether to exist in the industry or to exit from the industry. Thus, economics deals with the problem of choice.INTRODUCTION Other scarcity definitions Similar scarcity definitions are given by many other economists. Georage J. Stigler in his ‘Theory of Price’ (1947) says, “Economics is the study of the principles governing the allocation of scarce means among competitive ends when the objectives of allocation is to maximise the attainment of ends." Wicksteed in his ‘Commonsense of Political Economy’ says, "Economics is the study of those principles on which the resources of a community should be so regulated and administered as to secure the communal ends without waste." Prof. T. Scitovsky in his ‘Welfare and Competition’ says, "Economics is a social science concerned with the administration of scarce resources." Chander says, ‘Economics is the study of the process of making a living and the problems of economics are those arising from the fact of scarcity." Merits of scarcity definition or superiority of scarcity definition over welfare definition : Scarcity definition is superior to the welfare definition due to the following merits : (1) Scientific.—Robbins’ definition is more scientific than Marshall’s definition since it is not based on artificial classification of wants as material and non-material. It is independent of such classification. He has made the study of economics analytical. (2) Clearer on the scope of economics.—Marshall had restricted the scope of economics to wealth and activities which related to the material welfare of man only. Robbins widened the scope of economics by making the subject-matter of economics the choice problem which arises due to the resources being scarce and the wants being unlimited. (3) Status of positive science.—Robbins made economics a positive science, whereas Marshall regarded it as a normative science. Robbins wanted the subject to be a positive science, that is, a science which has nothing to do with the goodness or bad nature of ends. He wanted to study all economic activities without bringing in the welfare of mankind. No charge of ‘preaching of Mammonism’ can be levelled against it. (4) Pure science.—Robbins raised economics to the level(5) (6) (7) (8) PRINCIPLES OF ECONOMICS FOR LAW STUDENTs of pure science, whereas earlier economists regard jt both as science and an art. ; A universal definition.—Robbins definition _ applicable everywhere. It is concerned with unlimiteq wants and limited resources which is the problem faceq everywhere. The laws depending upon this definition shall be applicable to all societies... Points out the central problem of economics, Marshall’s definition was defective due to the failure of the definition in identifying the central problem, Robbins laid down that the central problem of economics is choice and valuation. Wider content.—According to Robbins, economics takes into account all types of human wants, material or non-material, as well as all types of persons whether living in society or not. Clear conception of human behaviour for economics.—He said that it is human behaviour for choice between ends and means. It takes no responsibility for selecting the ends. The ends may be good or bad, economics is not concerned. Wherever the ends are many and the means are scarce, economics is directly concerned. Criticism of Robbin’s Definition (1) (2) (3) (4) Concealed concept of welfare.—Robbins rejected Marshall’s definition for its welfare content. According to critics, his ‘ends’ are related to welfare and his definition has a concealed concept of welfare. It is only an old wine in new bottle. Self-contradictory.—Robbins has contradicted himself by his two views about choice between ends. In the first place, he contended that economics is neutral as regards ends. Secondly, he considers economics as the science of choice. These two contentions are mutually contradictory. Absence of human touch.—In Robbins’ definition, the human touch is entirely missing as he neglected the welfare of the human beings. More abstract.—Robbins made economics more abstract and complex and hence it became difficult and unfruitful. This detracts from its utility for the common |INTRODUCTION (5) (6) (7) (8) (9) man. Reduced to valuation theory.—His definition has reduced economics merely to valuation theory. Fraser says, "Economics is more than a value theory or equilibrium analysis or resource allocation." Static in content.—The greatest defect in Robbins’ definition is that it is static in content and as such suffers from inadequateness. Choice of individuals as subject-matter.—Choice of individuals as such has no particular significance. We study choices if they have social repercussions. Individual choices having no social implications cannot form the subject-matter of economics. Ineffective attempt to make economics a positive science.—Critics have also charged Robbins with trying in vain to make economics a positive science. Does not explain the problem of unemployment.— Robbins’ definition of economics does not explain the problem of unemployment. This definition has no use to under-developed countries. (10) Does not cover the economic growth.—Economics of growth explains how an economy grows and the national income increases. Robbins takes the resources as given and discusses only their allocation. In ‘spite of all these criticisms, Robbins’ definition is considered by many economists as the best one. Comparison of Robbins’ and Marshall’s Definitions There are some similarities and differences between Robbins’ and Marshall’s definitions of economics. They are : Similarities qd) (2) (3) Wealth and scarce means.—Marshall used the word ‘wealth’ and Lord Robbins used the words ‘scarce resources’. The meaning of these two is the same. In economics, wealth is only that good which is scarce. Primary place to man.—Both Marshall and Robbins assigned primary place to man and both the definitions stress the study of human behaviour and man’s action. Rational man.—Marshall assumed that the man aims at maximising his welfare, whereas Robbins believed that the rational man tries to maximise his satisfaction.PRINCIPLES OF ECONOMICS FOR LAW STUDEWrs Both the definitions take rational man for their study as satisfaction is a sign of welfare. Differences a (2) (3) (4) (5) (6) @ Modern economists extended Robbins’ ic and non-econonj, Distinction between econo ‘economics activities i cae pape A and non-material and he deals sath, material goods, promoting material ae For Robbins, difference beeweee material and non-materia} activities is of no use. oar and human science.—According to Marshall, economics is a social science which studies normal social human beings. In Robbins’ view, economics is a human science concerned with the economic activities of all men, whether ordinary or extraordinary, since everyone faces the economic problem. Normative and _ positive science.—Marshall’s definition clearly made economics a normative science by including human welfare. Robbins wanted economics to be positive science. He made the economics neutral between ends. Classificatory and analytical definitions.— Marshall’s definition. is classificatory in nature. He separated the material activities from non-material activities. Robbins, on the other hand, gave an analytical definition which was centred on the basic economic problem of scarcity. Practical and theoretical view.—Marshall’s definition considers economic policies. Robbins’ definition is of an abstract nature. Difference regarding man and his welfare.—In Marshall’s definition, emphasis is on man in sharp contrast to the emphasis on the economic problem in Robbins’ definition. Marshall’s definition has a human element while Robbins’ definition, being scientific lacks the human touch. Applicability to different economic systems.— Marshall’s definition is rele rsha var.; only for a monetary capitalist economy where individual choice is free. Robbins’ definition is relevant for all economic systems whether primitive or advanced. definition byINTRODUCTION incorporating economic development and growth. (4) Modern or Growth Definition Robbins’ definition excludes from its purview the problem of economic growth. It takes an entirely static view of an essentially dynamic problem. Prof. Samuelson gave modern or growth definition in his book ‘Economics’ as follows : ; "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 among various people and groups of society." Similar growth definitions are given by other modern economists also. Spencer, Milton, H in his ‘Contemporary Economics’ says, "Economies is a social science concerned with the proper uses and allocation of resources for the achievement and maintenance of growth with stability." Frederick Benham in his book ‘Economics’ says,'Economics is a study of the factors affccting the size, distribution and stability of country’s national income." The main features of Samuelson’s definition are : (1) Like Robbins, Samuelson has stressed the problem of scarcity of means in relation to unlimited ends. (2) Unlike Robbins, Samuelson has made his definition dynamic by including the element of time in it. Such phrases as "to produce various commodities over time" and "distribute them for consumption now and in the future" were intended to stress the dynamic nature of his definition. (3) Samuelson’s definition is not only dynamic in content, it is also wider in scope. It is applicable even to a barter economy where money is conspicuous by its absence. The main thing about Samuelson’s definition is that it deals with the problem of choice in its dynamic setting. (5) It is an exhaustive, comprehensive and expansive of Robbins’ definition. Economics is considered as the study of the allocation of scarce resources and of the determinants of income, output, employment and economic growth. (4PLES OF ECONOMICS FOR LAW STUDEy? (6) The growth definition of Samuelson has also a universa) appeal. It is applicable to all sorts of economics. Past present and future. The ‘growth definition’ alse transcends all ideological differences, being equally applicable to capitalist, socialist and communist, and mixed economies because the problem of choice in its dynamic setting arises in all Samuelson’s definition is the most acceptable definition of Economics at the moment.| (C) NATURE AND SCOPE OF ECONOMICS I. Economics as a science Lord Robbins, Walras, Cournot, Antoine Augustin ang Senior, Nassau William considered economics as a science, 4 science is a systematic and comprehensive study of facts which explain the cause and effect relationship. A science must have the following features : (A science is a systematised study of a subject. (i) Science establishes the relationship between cause and effect of a fact. (iii) Laws of science are universal. Prof. Robbins says, "The Propositions of economics are on all fours with the propositions of all other sciences." Robertson says that the last three letters of the word ‘economics’, i.e., ‘ics’ Present a clear proof that it is a science like physics and dynamics which have ‘ics’ at the end as economics. Arguments in favour of economics as a science (1) Systematised study,—In economics, there is a systematised collection, classification and analysis of economic facts. The subject-matter of economics is systematically divided into consumption, production, exchange and distribution, (2) Eg 5 2. & 5 R g = = e ler sciences. In economic laws, we e 1 7 Stablish cause and effect relationship of economic activities. For example the ‘41 Ps e relationship between ; Serna ee eer fe a change in price and change in (3) Experiments.—Economics carry several experiments with the laws of economics, The experiments of economic laws are not made in laboratories, but in theDUCTION 15 real world and with the men in society. (4) Measuring rod of money.—The economic facts are measured with the measuring rod of money. Economics has the quality of quantitative measurement of events. Universal.—All the economic laws are universally true. The laws of economics are equally applicable to capitalist, socialist, and mixed economy. (5) Arguments in favour of ‘economics is not a science’ Some economists like Marshall do not regard economics as a pure science. The main reasons for this are as under : (1) The laws of economics are not universal.—The applicability of economic laws is limited by the differences in physical, social and cultural factors between different countries. The laws of economics are based on the habits and tastes of the people. These laws differ for different countries. Therefore, the laws of economics are not so universal. The laws of economics are not so exact.—The laws of economics are not so exact as they are conditional and with the phrase, ‘other things remaining the same’. But the laws of pure sciences are exactly applicable under similar conditions. No possibility of laboratory experiments.—In economics, experimentation is not possible as the object of its study is man. The conditions around the man are not fully controllable. The data available to economists from the real world is not controllable. economics is not a pure science. (4) Conflicting views.—Mrs. Wooton has remarked, “Wherever six economists are gathered there are seven opinions." The lack of unanimity of opinion among economists proves that it is not a science of exactness. Difficulties in making predictions.—The difficulty in making correct predictions in economics is due to its inexact laws. Therefore, economics cannot be considered as a pure science. (2) (3) Hence, (5) There is the difference of opinion among economists regarding economics as a pure science or not. But it can be considered as a social science.Ill. Is economics a positive science science ? A positive science may be defined as a body of systematised knowledge concerning ‘what is’; a normative science or a regulative science is a body of systematized knowledge relating to the criteria of ‘what ought to be’ and concerned with the ideal as distinguished from the actual. The objective of a Positive or a normative € science and Marshall, Pigou, Howtrey, etc. : : consider, ics as a normative scienca. dered economINTRODUCTION 17 because it explains the facts as they are. According to R.T. Bye, "Positive science confines itself to accurate description of a phenomenon, it explains what is, how it works and what are its effects." Robbins says, "The function of an economi and explain and not to advocate or condemn." Arguments in favour of economics being a positive science. (1) Based on logic.—Lord Robbins says that economics is & positive science as it is based on the logic. With the help of logic, it establishes the relationship between cause and effect. (2) Things as they are.—Economic concepts explain their cause and effects. Positive economics deals with how economic problem is solved. We study in economics what are the forces which influence the determination of the rate of interest and what determines the rate of interest in a community, (3) More neutral.—Economics is strictly neutral as regards ends, it refuses to pass moral judgments. (4) More uniformity.—Economics as Positive science will be more uniform in decisions regarding different problems. ist is to explore Economics as a normative science The following arguments are given by different economists in favour of economics as a normative science : (1) Man is not only logical but also sentimental.—Man cannot behave always as a rationalist, He behaves sometimes in relation with the binding forces of relationship and sometimes with the influence of demonstration effect. (2) A means of social betterment.—Economics _ is regarded as a normative science due to the fact that economics is an engine of social betterment. Economists Suggested the policy of Jaissez faire, removal of unemployment, checking the rising Population, etc. to Promote human welfare. So, it is a normative science. (3) Basis of economic planning.—Economic planning has been suggested for economic development. In economic planning, economic Policies should be prescribed. Therefore, economics is a normative science dealing with what ought to be. (4) Economics is not neutral.—The market meck.anismi” PRINCIPLES OF ECONOMICS FOR LAW STUDENTS decides the value through the forces of demand and supply at equilibrium level. But the equilibrium price level does not mean that it is the optimum price leve] for the society and that government should take no steps to curb the price level. In reality government undertakes various measures to curb the rising prices, So economics is not neutral as regards ends. Hence, it is a normative science. Economics is considered both a positive and a normative science as it has both the characteristics. The function of the economist is not only to explain and explore, but also to suggest and condemn. ewe A et(D) Economic Laws The economic generalizations are called laws or principles or theories or models of economics. Prof. Marshall defined them thus : "Economic Laws or statements of economic tendencies are those social laws, which relate to branches of conduct in which the strength of the motives chiefly concerned can be measured by money price." According to Robbins, the economic laws are statements of uniformitiés which govern human _ behaviour concerning the utilisation of limited resources for the achievementprcipLes oF ECONOMICS FOR LAW STUDENTS ; Law of 2 of unlimited ends. Examples of economic 1aws are uti Demand, Law of Variable Proportions. ‘Law of Substitution, y others. Psychological Law of Consumption an‘ man} Nature or characteristics of economic laws The following are the features of econom! differentiate economics from other sciences * an beings— qa) Economic laws al science of man. Its laws laws which to " : a study Economies is 4 soc ee fi js roducers, consumers, aoe to Dd bes nes Ne as = tsrefore, not S0 employers and W' . aN t. ri aly stated a8 human behaviour is not constant ' f tendencies.—The Jaws of economics (2) Statements ‘are not certain. ‘They merely sg, rll ki jn order to satisfy our indi ould act in order : indicate how we om laws have exceptions. : normal conditions.— o 5 aera ® eee laws do not deal with particular individual or firm. The laws are stated in a general form. They take an average oF @ normal economic unit and lay down its economic behaviour. They may be applied to particular cases with some modifications oF qualifications. (4) Based on assump! the following assumptions : (i) There is perfect competition on which the working of a competitive economy stands. i) The economy works on the concept of equilibrium. (iii) The consumers act in a rational manner and seek maximum satisfaction. (iv) re consumers’ tastes remain unchanged for fairly long period of time. (v) ee He the average man who lives i" ety and does his economic activities in 4 normal way. tions.—Economic laws are based on (5) Economic _laws ; are hypothetical abstract—Economic laws are conditional since the” tail validity depends it pon the fulfil: r conditions or assumptions. All iment ae are conditioned under ‘other things remaining th same (ceteris paribus). ing me (6) Economic laws are not exact.—Economic laws JackINTRODUCTION 2 (7) (8) (9) the definiteness and exactitude found in laws of sciences. E.H. Brown has observed, “Economic laws are inexact because they deal not with a constant, uniform and inert matter but with the changing and thinking of human being." Economic laws are relative.—The laws of economics are always related to a particular set of circumstances in a society. When there is change in circumstances. the laws of economics must also be restated. ‘ Economic laws sometimes axiomatic.—Some of the economic laws are so obvious that they need not be stated and explained. They may be taken to be understood. A few economic laws are universal in nature.— Some economic laws apply everywhere at all times. For example, the Law of Demand, the Law of Diminishing Returns are universal economic laws. (10) More exact than the laws of other social sciences.—As economics has the quantitative instrument of- money, economic laws are more exact than the laws of other social sciences like Politics, Sociology, etc. Causes of uncertainty of economic laws qa (2) (3) (4) (5) (6) Study of man.—The economic laws are related to the subject of economic man, who acts according to his own will. Less possibility of experiment.—We cannot successfully experiment the acts of economic man, because we cannot direct and command human being to act as we desire. Defective measuring rod.—Though money is the measuring rod of economics, it is a defective measuring device as the value of money fluctuates quite often. Effect of different tendencies—A social man is affected by several tendencies of economic, political, religious, cultural, etc. It is difficult to predict human behaviour correctly. Other things being equal.—They are true only when their assumptions hold good. Effects of unknown factors.—Economic events are affected by several unknown factors which are not> PRINCIPLES OF ECONOMICS FOR LAW STUDENT, adequately discovered. Due to uncertainty of economic laws, Marshall says, "Th laws of economics are to be compared with the laws Of tides rather than with the simple and exact laws of gravitation.” Types of Economic Laws On the basis of the nature of economic laws, they may be categorised as : . . (i) Laws which state quantitatively a relationship betwee, variables which can be directly observed; (ii) Laws which express relationship between variables which need to be properly defined and specified so that they can be measured; and (iii) Laws which formulate broad tendencies of behaviour and the variables involved are _ incapable measurement. Most of the economic laws fall into the second category. Thus, the economic laws are qualitative in nature and not exactly stated in quantitative terms. They tell the kind or direction of change, which is expected rather than the amount of change. But Robbins declared, "The laws of economics are on all fours with the laws of physical sciences." He also held that economic laws are universally applicable. He mentioned Gresham’s Law, Quantity Théory of Money, the Law of Diminishing Marginal Utility and the Law of Substitution. But, most modern economists have found it difficult to share Robbins’ verdict because t! ; he content of economics is complex and ever changing. of(F) ECONOMIC ANALYSES Micro and macro analyses Economics is divided into ‘Micro-economics’ and ‘Macro-economics’.. The terms micro economics and macroINTRODUCTION 27 economics were coined by Prof. Ragnar Frisch of Oslo university in 1933. Micro means ‘small’ and macro means ‘large’. The words ‘micro’ and ‘macro’ are Greek words, Micro-economics is the study of the economic action of individuals or groups and macro-economics is the study of broad aggregates. Micro-economics According to Boulding, "Micro-economics is the study of particular firm, particular household, individual price, wage, income, industry and particular commodity.” In the words of Leftwitch, "Micro-economics is concerned with the economic activities of such economic units as consumer, resource owners and business firms." Micro economics is also called, "price th and "partial equilibrium analysis." Micro economics deals with the behaviour of individual These units include consumers, workers, firms-in fact, any individual he functioning of economy. eory", "value theory" economic units. investors, owners of land, business or entity that plays a role in t Micro-economics explains how and why these units make economic decisions. For example, it explains how consumers make purchasing decisions and how their choices are affected by changing prices and incomes. It also explains how firms decide how many workers to hire and how workers decide where to work and how much work to do. Another important concern of micro-economics is how economic units interact to form larger units such as markets and industries. By studying the behaviour and interaction of individual firms and consumers, micro-economics reveals how industries and markets operate and evolve, why they differ from one another, and how they are affected by economic conditions and economic policies. Micro-economics is concerned with the explanation and prediction of observed phenomena based on theories. Micro-economics (i) Explains the working of a free enterprise economy; (ii) Explains how prices are determined; Gii) Explains conditions of efficiency in production and distribution; (iv) Provides tools for economic policies; (v) Helps in the efficient employment of resources;PRINCIPLES OF ECONOMICS FOR LAW STUDENTS 28 ) Hel; business executives and manageria] (vi) Helps a et maximum satisfaction; ii the consumer to get 1 es mae in understanding the problems of vill, a Is helpful in international trade and foreign 1X, xchange; and ; : (a) Explains the conditions of economic welfare. Macro-economics . " ics deals not wit zane Baas en apenas of then individual quantities as such but with aggre; Gon amen quantities, not with individual income but with feet : not with individual prices but with price levels, not wit individual outputs but with national output,’ ; Gardner Ackley says, "Macro-economics concerns with such variables as the aggregate volume of the output of an economy, with the extent to which its resources are employed, with the size of national income and, with the general price level. Maero economics is called ‘aggregate economics’. It is also known as the ‘theory of money, income and employment’. Macro-economics deals with aggregate economic quantities, such as the level and growth rate of national output, interest rates, unemployment, and inflation. Macro-economics involves the analysis of markets—for example, the aggregate markets for goods and services, for labour and for corporate bonds. Thus, Macro-economics : (i) Gives us a bit ird’s eye-view of the economy as a whole; (ii) Formulates useful economic policies; (iii) Studies economic growth; (iv) Studies the economy in its dynamic aspects; (v) Removes the incompleteness of micro-analysis: (vi) Changes in the Seneral price level: : (vii) Studies the national income; (viii i i functi Allele in understanding the functi (ix) Studies the trade cycles ning of an(1) Micro-economics INTRODUCTION Differences between micro and macro economics Micro-economics studies the individual units of the economy like a firm. Micro-economics studies the principles, problems and policies concerning the optimum allocation of resources. The subject-matter of micro-economics deals with the determination of price, consumer’s equilibrium, distribution and ' welfare, etc. Laws of micro-economics are formulated by taking some assumptions. They establish relationship between the causes and effects of economic phenomena. It is known as ‘partial equilibrium analysis’. Micro-economics studies the equilibrium between the forces of individual demand and supply or market demand and supply. Micro-economics, assumes full employment, constant production and income. Macro-economics (1) Macro-economics deals with aggregates like national income and aggregate savings. It studies the problems of the economy as a whole. Macro-economics _ studies the problems, policies and principles relating to full employment of resources and growth of resources. The subject-matter of macro-economics is full employment, national income, general price-level, trade cycles, economic growth, etc. The relationship between aggregate factors, total consumption and investment, etc. are studied in macro- economics. It is called “general equilibrium analysis." Macro-economics analysis deals with the equilibrium between the forces of aggregate demand and aggregate supply of the whole economy. Macro-economics assumes how the factors of production are distributed and it explains how full employment can be achieved.PRINCIPLES OF ECONOMICS FOR LAW STUDENys 30 Macro-economics Micro-economics 7 xxions (7) Macro-economic decision isi decisi i i cisions on ” do not hold i ye for the may not hold true for the oan as a whole. They individuals. are called ‘Macro-economic paradoxes’ or fallacy of gation. . (8) Micro-economies deals with (8) Macro-economics — is individuals who = are concerned with immorta| mortal. aggregates and it studies society as a whole. In micro and macro-economics, the difference between the individual and the society is similar to the difference between a tree and forest. They are different ways of studying the same set of phenomena but the approach is different. To understand how the aggregate markets operate in macro-economics, one must first understand the behaviour of the firms, consumers, workers, and investors who make up these markets. Thus, macro-economics has become _ increasingly concerned with the micro-economic foundations of aggregate economic phenomena and much of macro-economics is actually an extension of micro-economic analysis.|__| __ Micro Economics L1_| Unit of Study: individual Method: Slicing | Subject Matter : Study of — | Study of National Income, ee ek ee ella ee product arid factor pricing general level of prices, trade etc. cycle Basis : Based on Based on Interdependence independence Core of study: Price Income Theory Theor Advocated by : Alfred John Maynard Keynes Marshall 7 ‘| Vision : Worms eye view: | Birds eye view Forest as a study of a tree whole Approach: individualistic Quality of Analysis : Difficult and complicated, Simple and easy