Definition by Adam smith
Adam Smith, the father of modern economics, defined economics as a social science that studies how people use scarce resources to satisfy their unlimited wants. In his seminal work “The Wealth of Nations,” Smith proposed a comprehensive definition of economics that has remained influential to this day.
In this book, Adam Smith says “Economics is the science of wealth”.
Smith’s definition of economics comprises four dimensions: scarcity, choice, self-interest, and competition. Let’s delve into each of these dimensions and explore their significance.
Dimensions of Adam Smith’s Definition
1. Scarcity:
According to Smith, economics is concerned with the allocation of scarce resources. Scarcity implies that there are not enough resources to satisfy all of our wants and needs. Hence, we must make choices about how to allocate these resources.
2. Choice:
Smith argued that economics is fundamentally about choice. Individuals and societies must choose how to allocate scarce resources to satisfy their wants and needs. This involves making trade-offs and weighing the costs and benefits of different options.
3. Self-Interest:
Smith famously argued that individuals are motivated by self-interest. In his view, individuals seek to maximize their own well-being, and this pursuit of self-interest is the driving force behind economic activity. Smith believed that this pursuit of self-interest ultimately benefits society as a whole, as individuals are led by an invisible hand to produce goods and services that others value.
4. Competition:
Criticism on Adam Smith’s Definition of EconomicsFinally, Smith recognized the importance of competition in driving economic activity. He argued that competition among producers leads to greater efficiency and innovation, as firms seek to lower costs and differentiate their products from those of their competitors.
Smith’s definition of economics has been influential in shaping modern economic thinking. However, his ideas have also been subject to criticism, particularly in the areas of self-interest and competition.
Criticism on Adam Smith’s Definition of Economics
Adam Smith’s definition of economics, as outlined in his seminal work “The Wealth of Nations,” has been the subject of much debate and criticism. While Smith’s ideas have had a profound impact on modern economic thinking, they have also been challenged on a number of fronts. In this blog, we will explore some of the main criticisms of Smith’s definition of economics.
1. Wealth is not a measure.
Adam Smith’s definition of wealth as the accumulation of goods and services is often criticized for being illogical because wealth is not an end goal in itself. Instead, wealth serves as a means to achieve other goals. In other words, people use their wealth to purchase goods and services that can satisfy their needs or help them achieve their goals. Wealth itself cannot directly satisfy any human need. Therefore, while wealth is important, it should not be considered the ultimate objective of human endeavors.
2. Human welfare is ignored.
A subject cannot claim to be a social science if it ignores or rejects the concept of human welfare. Adam Smith is often criticized for rejecting the importance of human welfare in his economic theories. In contrast, modern economics places a strong emphasis on human welfare as a central goal of economic activity. Therefore, any subject that neglects or dismisses the significance of human welfare cannot be considered a legitimate social science.
3. SUBJECT MATTER IS MISSING
The main objective of the study of economics is to provide a framework for solving problems related to human needs, scarcity, and means of satisfying them. The subject matter of economics includes the study of how individuals, businesses, and societies allocate their resources to meet their needs and wants. Adam Smith’s definition of economics, which focuses on the accumulation of goods and services, does not fully capture the subject matter of economics as it neglects the fundamental problem of scarcity and how resources should be allocated to meet human needs. Therefore, the study of economics should encompass the subject matter of resource allocation and problem-solving in the face of scarcity.
4. Services are ignored.
In economics, the terms “goods” and “services” are used to describe two types of products. While goods are tangible products, services are intangible products. National income is calculated by adding both goods and services produced by a country’s economy. However, Adam Smith’s definition of wealth as the accumulation of goods focuses solely on material goods and neglects the importance of services. This is problematic as services play a critical role in the modern economy and are essential for human well-being. Therefore, a comprehensive definition of wealth should include both material goods and services.
5. Self-Interest:
One of the most significant criticisms of Smith’s definition of economics is his emphasis on self-interest as the primary motivator of economic activity. Critics argue that this narrow view of human behavior ignores other important factors such as social norms, empathy, and altruism. They argue that a focus on self-interest alone can lead to a limited understanding of economic decision-making and a failure to account for the complexities of human behavior.
6. Competition:
Another key criticism of Smith’s definition of economics is his emphasis on competition as the primary driver of economic efficiency and innovation. Critics argue that this view ignores the role of collaboration and cooperation in driving progress. They argue that a focus on competition alone can lead to a zero-sum view of economic activity, where gains by one individual or firm necessarily come at the expense of others.
7. The Invisible Hand:
Smith’s concept of the invisible hand has also been subject to criticism. The invisible hand refers to the idea that individuals pursuing their own self-interest will ultimately lead to the best possible outcome for society as a whole. Critics argue that this view is overly simplistic and fails to account for the role of externalities, market failures, and imperfect information in the economy.
8. Wealth and Happiness:
Finally, some critics argue that Smith’s definition of economics is too narrowly focused on material wealth and does not take into account the broader aspects of human happiness and well-being. They argue that a more comprehensive view of economics should consider factors such as social relationships, health, and environmental sustainability.
Conclusion
In conclusion, while Adam Smith’s definition of economics has been highly influential in shaping modern economic thinking, it is not without its flaws and criticisms. Critics have challenged his emphasis on self-interest, competition, the invisible hand, and the narrow focus on material wealth. As the field of economics continues to evolve, it is important to consider these criticisms and strive towards a more comprehensive understanding of economic activity and its impact on society as a whole.
References
- Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Printed for W. Strahan and T. Cadell, London.
- Hausman, D. M., & McPherson, M. S. (2006). Economic Analysis, Moral Philosophy, and Public Policy (2nd ed.). Cambridge University Press.
- Milgate, M., & Stimson, S. (Eds.). (1998). After Adam Smith: A Century of Transformation in Politics and Political Economy. Princeton University Press.
- Sen, A. K. (1987). On Ethics and Economics. Basil Blackwell.
- Stiglitz, J. E. (2015). The Great Divide: Unequal Societies and What We Can Do About Them. W. W. Norton & Company.