Macroeconomics

Macroeconomics analyses the behaviour of the whole economic system in totality or entirely. In other words, macroeconomics studies the behaviour of the large aggregates such as total employment, the national product or income, the general price level of the economy. Therefore, macroeconomics is also known as aggregate economics. Prof. Boulding says, “Macroeconomics deals not with individual quantities as such but with the aggregates of these quantities; not with individual incomes but with the national income; not with individual prices but with the price level; not with individual output but with the national output”

Gardner Ackley says “macroeconomics concerns itself with such variables as the aggregate volume of output in an economy, with the extent to which its resources are employed, with the size of the national income, with the “general price level”. Microeconomics, on the other hand, deals with the division of total output among industries, products and firms and the allocation of resources among competing uses. It considers problems of income distribution. Its interest is in relative prices of particular goods and services.”

Micro economics

A.P. Lerner, a noted American economist “In microeconomics we are more concerned with the avoidance or elimination of waste, or with inefficiency arising from the fact that production is not organised in the most efficient possible manner. Such inefficiency means that it is possible, by rearranging the different ways in which products are being produced and consumed, to get more of something that is scarce without giving up any part of any other scarce item, or to replace something by something else that is preferred”

Importance and uses of microeconomics

It is microeconomics that tells us how a free-market economy with its millions of consumers and producers work to decide about the allocation of productive resources among the thousands of goods and services. As Prof. Watson says, “microeconomic theory explains the composition or allocation of total production, why more of some things are produced than others”

Prof. Lerner quote “Microeconomics teaches us that completely ‘direct’ running of the economy is impossible – that a modern economy is so complex that no central planning body can obtain all the information and given out all the directives necessary for its efficient operation”

definitions

Some recent definitions

Professor Henry Smith, economics is “the study of how in a civilised society one obtains the share of what other people have produced and of how the total product of society changes and is determined.”

Prof. Samuelson, a Nobel Laureate in economics, defines economics as “the study of how societies use scarce resources to provide valuable commodities and distribute them among different people”

According to Jacob Viner “economics is what economists do”

Scarcity Definition

According to Lionel Robbins, economics studies the problems which arise because of the scarcity of resources. Nature has not provided mankind sufficient resources to satisfy all its wants. Therefore, the people have to choose for which ends or for which wants the resources are to be utilised. Thus, according to Robbins, economics is the science of scarcity and it studied how the scarce resources are allocated among their different uses. Thus he has given the following definition: “Economics is the science which studied human behaviour as a relationship between ends and scarce means which have alternative uses”

Unlimited Wants – Man’s wants are unlimited is a very important and fundamental fact of economic life of the people. If man’s wants are limited, then no economic problem would have arises. But in the real life of the people there is no limit to their wants; when one want is satisfied, another, another want crops up. An important thing to know about wants is that they are not of equal intensity; some are more intense than others.

Scarce Means – if resources are unlimited, no economic problem would have arisen because in that case all wants could have been satisfied and there would have been no problem of choosing among the wants and allocating the resources among them.

Alternative use of means – the resources can be put to various uses.

Economics is neutral between ends – economist only tells in what ways the given ends or wants can be achieved with the minimum possible resources. Task of economist is not to praise or condemn but only to analyse and explain. According to Robbins, economics is neutral between ends.

Economics is a science of choice – whenever the resources are scarce and the wants are many, the question of choice arises. Robbins remarks “When time and means for achieving ends are limited and capable of alternative application and the ends are capable of being distinguished in order of importance, then behaviour necessarily assumes the form of choice”

Professor Wicksteed says that economics is a “study of those principles on which the resources of a community should be as regulated and administrated as to secure social ends without waste”

Professor Stigler defines “Economics is the study of the principles of governing the allocation of scarce means among competing ends when the objective of allocation is to maximise the attainment of the ends”

Scitovosky says, “Economics is a social science concerned with the administration of scarce resources”

Professor Erich Roll defines “The economic problem is essentially a problem arising from the necessity of choice; choice of the manner in which limited resources with the alternative uses are disposed of. It is the problem of the husbandry of resources.... economics studies the activity of husbandry.”

Critical Evaluation of Robbins’ definition

The main charge against Robbins is that he has made economics quite impersonal, colourless and devoid of any normative element. He says equilibrium is just an equilibrium. He does not seek to make economics as study of human welfare. Therefore, many economists like Durbin, Fraser, Beveridge and Wootton have tried to defend Marshall’s idea about the true scope of economics and its objective of the promotion of social welfare. Wootton has said that “It is very difficult for economists to divest their discussions completely of all normative significance”

Various criticisms

-         It is not justified on his part to oppose making economics as an engine of social welfare.

-         He made economics neutral between ends.

-         Professor Thomas rightly remarks “the function of the economist is not only to explain and explore but also to praise and condemn”

-         It has reduced economics to a mere value theory. According to Robbins, Economics is should study only the allocation of resources among the production of various goods and consequently how the prices of goods and factors are determined. But the scope of economics is wider than the allocation of resources and the price theory.

-         It does not cover the theory of economic growth and development. The theory of economic growth and development studies how national income and per capita income of a country increase over a long period of time and what factors causes such increases.

-         Even the problem of unemployment which is being faced by both the developing and developed countries of the world is not covered by Robbins’ definition

-         According to Professor Schultze of University of Maryland, Robbins’ definition of economics is miss leading, “in particular it does not fully reflect two of the major concerns of modern economics, growth and instability”

Welfare definition

Marshall was the first economist who lifted the science of economics from the disrepute it had fallen into due to its being associated with the study of wealth. Marshall pointed out that, for economics, wealth is not an end in itself but it is only a means to an end; the end being the promotion of human welfare. Thus, according to Marshall, wealth is only a secondary thing; it is man and his ordinary business of life which is the primary object of economic study. In fact, Marshall tried to make the study of economics an engine of social betterment. With this end in view, Marshall gave the following definition of economics “Political economy or economics is the 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”. Marshall writes “Economics on the one side is study of wealth and, on the other and more important side, a part of the study of man” Marshall says “Economics is study of man’s action in the ordinary business of life. It enquires how he gets his income and how he uses it.

Cannan defines “The aim of Political Economy is the explanation of the general causes on which the material welfare of human beings depends” According to Cannan, economic enquiries into the factors which determine the material welfare of human beings.

Pigou describes that “the range of our enquiry becomes restricted to that part of social welfare which can be brought directly or indirectly into relationship with the measuring rod of money”

Critical Evaluation

Robbins says “A theory of wages which ignored all those sums which were paid for immaterial services or were spent on immaterial ends would be intolerable” Robbins remarks “Why talk of welfare at all? Why not throw away the mast altogether.”

Wealth definition

According to Adam Smith economics enquires into the factors that determine wealth of a country and its growth. In his book Wealth of Nation Smith analyses the factors that determine the growth of the volume of production. “The great object of Political Economy of every country is to increase the riches and power of that country”. Adam Smith emphasised the production and expansion of wealth as the subject matter of economics. However, Ricardo shifted the emphasis from the production of wealth to the distribution of wealth. Ricardo writes: “The produce of earth – all that is derived from its surface by the united application of labour, machinery and capital is divided among three classes of the community, namely, the proprietor of land, the owner of the stock of capital necessary for its cultivation, and the labourers by whose industry it is cultivated”. He further writes “To determine the law which regulate this distribution, is the principal problem in political economy”

            Besides Adam Smith and Ricardo, other classical economists too regarded economics as study of wealth.

J.B Say – French economist – “Economics is the science which treats of wealth”

F.A Walker – “Political Economy or Economics is the name of that part of knowledge which relates to wealth”

Critical evaluation

Carlyle and Ruskin – ‘Gospel of Mammon worship’, a ‘Pig science’ and ‘dismal science’

They said that economists have ignored the higher values of life and are hankering after formulation of laws which seek “to enrich both the people and sovereign”

Malthus, a renowned economist, makes it clear as to why only material goods are regarded as wealth. He writes: “If we wish to attain anything like precision in our inquiries, when we treat of wealth we must narrow the field of enquiry and draw some line which will leave us only those objects, the increase or decrease of which is capable of being estimated with more accuracy”

Prof. Amartya Sen, a Nobel Prize winner in economics, have emphasised the role of education, health and good administration and have shown that they greatly raise the productivity of man and promote economic growth of the nation.