According to Adam Smith, “Economics is the science of wealth.” Adam Smith is the author of the well-known book, “The Wealth of Nations” (1776). He is considered the Father of Political Economy for he was the first man to put almost all the economic ideas in a systematic manner and only after him economics has come to be studied as a systematic science.
The word ‘wealth’ has a special meaning in economics. In the ordinary language, it means money. But in economics, it refers to those things that are necessary to satisfy human wants. However, it should be remembered that all things that satisfy human wants are not wealth. For example, air and sunlight are essential for man. In fact, man cannot live without them. But they are not wealth because they are available in unlimited quantities. Only those goods that are relatively scarce and have money value are considered wealth.
In economics, we study about the production of wealth distribution of wealth, exchange of wealth and so on. In fact, J.S. Mill defined economics as “the practical science of the production and distribution of wealth”. In short, according to Adam Smith, economics is concerned with the problems arising from wealth-getting and wealth-using activities of men.
The definition of Adam Smith has been subject to a number of criticisms. It has got a bad name for economics. Social scientists like Carlyle and Ruskin have called it “a dismal science”, “a dark science” because of its emphasis on wealth. But their criticism is unfair. Those critics really did not understand the nature and scope of economics. They understood the word “wealth” in its popular meaning of money and concluded that it is a science that taught men to make money. So they considered it a selfish science on account of its emphasis on “the means to get rich”.
The above charge against economics is a false one. Wealth in economics does not refer to money. But it refers to those scarce goods that satisfy our wants. Further, early economists used wealth in the sense of welfare. After all, wealth is produced not for its own sake but it is wanted for the promotion of the welfare of man. A great demerit of the definition of Adam Smith is that there is an unnecessary emphasis on wealth. Economics, no doubt, studies about wealth. But it can only be a part of the study. There is the other and more important side and that is the study of man. Economics is a social science and the proper study of mankind should be man and not wealth alone.
But there is one thing we should remember while discussing the definition of Adam Smith. That is the time in which he lived. Adam Smith was writing his book at a time when the introduction of large machinery driven by power and specialization of labor made possible the production of wealth on a large scale in England. It is only natural that Adam Smith emphasized on wealth and considered economics as the science of wealth.
Assumptions of Economics
Sometimes we hear some persons telling that economics is all right in theory but all wrong in practice. The main reason for this loose statement is that they do not realize that economic science is based on certain assumptions.
One of the most important assumptions of economics is that human beings act in a rational way. This does not mean that all men are very intelligent or highly educated. For example, if a good is sold in two places at different prices and if a man knows that both units of the good are the same, if he is a rational individual, he will buy in the cheaper market. In other words, when a person buys a thing he will try to get the greatest satisfaction for his money. Again when a businessman sells a thing he will try to get maximum profits. This is known as the assumption of economic rationality.
Another assumption we make is that social habits, customs and laws influence our economic actions. For example, if there is a change of styles and fashions, the business men will make profits or losses. Those who catch up with changes make profits and those who do not, make losses. We further assume that consumers’ tastes remain more or less constant. For example, we assume that meat-eaters will not become vegetarians often.
Another basic assumption that economists make is that scarcity is the fundamental problem of the world. “economics is fundamentally a study of scarcity and of the problems to which scarcity gives rise”. Lastly, we assume that there is a stable political and social system.