BCom 1st Year Significance of Economics Notes Study Material

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BCom 1st Year Significance of Economics Notes Study Material

Introduction

Significance of Economics is concerned with such questions as : Why study economics? What benefits are we to derive from such a study? Let us try to answer these questions.

Why study Economics?

(A) Economics is called “The Queen of Social Sciences”-oldest of the arts, newest of the sciences. There are several reasons for the study of such an important subject. Samuelson mentions one overriding reason for the need to study economics. In his words,

“All your life—from cradle to grave and beyond—you will run up against the brute truth of economics. As a voter, you will have to make decisions on issues that just can’t be understood until you’ve mastered the rudiments of this subject.”

Earning your lifetime income involves economics. Spending that income as a consumer does also. Saving and investing—the prudent handling of the nestegg that won’t handle itself-economics won’t guarantee to make you a genius in this important task. But without economics the dice are simply loaded against you.”

Economics is a fascinating subject. Generations of students have found it interesting. But many critics have also denounced economics as a dismal science. Its distinguishing feature is a deep, dark pessimism. It consists almost entirely of methods of proving that there is no cure for poverty. The critics have also denounced economics because it is too abstract, it is too complicated; it attributes base, selfish, monetary motives to everybody.

A.P. Lerner maintains that economics does not stop with painting this depressing picture. Increases in productivity have kept the Malthusian nightmare at bay in Western countries. Developing countries too could do the same either by raising output more rapidly or by keeping down the rate of population growth, or by both measures. So Lerner says, “Economics could with more justice be accused, not of pessimism, but of over-optimism….But while essentially optimistic, economics is not magic and cannot pull rabbits out of a hat.”

We should study economics not because economists are primarily interested in corporations, or cooperatives, or trade unions, or private enterprise, or government regulations of private enterprise, or prices, or production, or sales of goods and services. Economics should be studied because it is about people and their well-being.

Pigou too maintains that the motive behind economic study is “the promise of fruit and not of light that chiefly merits our regard.” Economists make a scientific study of men’s social actions so that it may lead, not necessarily directly or immediately, but at some time and in some way to practical results in social improvement. Economists’ impulse “is not the philosopher’s impulse, knowledge for the sake of knowledge, but rather the physiologist’s knowledge for the healing that knowledge may help to bring.”

We, therefore, study economics because it is not only light-giving but also fruit-bearing. Economics cannot rest contented merely by describing the truth of life. It is called on to suggest ways to improve the quality of economic life.

The best answer to the question : “Why study economics?” is contained in Keynes’ General Theory where he says.

“…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

The study of economics is, therefore, worthy of one’s time and effort as the ideologies of the modern world have been shaped in substantial measure by the great economists of the past-Adam Smith, David Ricardo, John Stuart Mill, Karl Marx and John Maynard Keynes. World leaders of today receive and invoke the advice and policy prescriptions of economists.

(B) Another way of answering the question “Why study economics?” is to look at it from the point of view of scarcity and choice. All societies face a common problem the problem of deciding how to use scarce resources to satisfy unlimited wants. This is the problem of choice.

Economics describes how such choices are made. But mere description is not enough. Economics establishes principles of decision that tell us how to make choices in order to attain certain goals. These principles are stated from the social as well as individual economic unit point of view.

There are many questions which always confront a society. Let us look at the following questions:

• Whether to impose taxes to finance certain public works, say, roads and dams or resort to public borrowing.
• Whether to use resources for the production of arms and ammunitions or to build low-cost houses.
• Whether to attempt to reduce unemployment or inflation or both.

Knowledge of economics helps policy-makers to answer these questions in a rational way and assists us, the voters in a democratic society, to take sides on economic issues.

Individual economic units like households and firm too have to decide because they face questions like:

• a consumer has to decide how to allocate scarce resources to achieve greatest satisfaction.
• a firm has to determine which combination of resources will permit the production of a given output at the minimum possible cost; etc.

An understanding of economics may help us to solve these issues in a rational way.

Benefits from the Study of Economics

The study of economics offers the following benefits:

(i) A basic understanding of economics is essential in order to be well-informed citizens. Most of the specific problems of the present-day world have economic aspects. These problems are solved in a democracy by representatives elected by the votes of the people. The voters must have a basic working knowledge of economics in order to make a correct choice.

(ii) Knowledge of economics is vital for more mundane and immediate reasons too. A business man who has an understanding of the operation of the economy is in a better position to formulate his policies. Thus economics is of practical value in business. More and more economists are being appointed today by large corporations. Their job is to gather and interpret economic information upon which rational business decisions can be made. Knowledge and understanding of economics assist the individuals as workers and consumers to take correct decisions about work and spending of incomes.

(iii) From the beginning of the twentieth century Nobel prizes are annually given in Physics, Chemistry, Medicine, Literature and Peace. Since 1969 a new Nobel prize in economics was instituted. It shows not only the coming of age of economics as a science but also the significance of economics in the present world.

(iv) Decisions in business and government have to face arguments for and against. Faced with opposite arguments what criteria should individuals, firms or governments use to choose among them becomes a very important question. Economics shows how to determine the best action, how to make the best choice through a systematic assessment of the pros and cons, costs and benefits. It should be noted that the economist is not like the advocate who gives only those arguments which favour his client. Economist compares the benefits with costs and the advantages with the disadvantages of alternative courses of action before coming to a rational choice.

Conclusion

All these show the significance of economics. But there is need for caution. “Economics is an academic, not a vocational, subject.” It is not like accounting, advertising, corporation finance, and salesmanship. It is not a how-to-make-money area of study. Knowledge of economics may help in running a business or in managing personal finance, but this is not its primary objective. “In economics, problems are examined from the social, not from the individual, point of view.” Economics is concerned with the derivation of economic principles which are applied in the formulation of policies in order to solve economic problems.

Economic theory is a box of tools; in other words, it furnishes the economist with tools of economic analysis. These tools “enable him not only to understand current problems but also to see the economic consequences of presuming a particular line of policy…. The economist cannot offer any final solution to the practical problems of everyday experience, though he may often be able to give advice or point out the economic advantages or disadvantages of a particular policy.”

Economics, believed Pigou, is worthy of study because it has made easier to institute practical measures to promote welfare so that “statesmen may build upon the work of the economist.” He says further that “it is not in the ordinary business of life that man is most interesting or inspiring.” He concludes therefore that the study of economics is not worth while for its own sake but only “for the healing that knowledge may help to bring.”

Significance of economics also lies in the fact that “some study of economics is at once a practical necessity and a moral obligation” because economic questions touch the daily lives of everyone.