A definition

Economics comes from the ancient Greek term oikonomia, meaning the management of a household. In its most basic denotation it is a word that deals with a small unit, the family, not a society.

So what’s the problem? Today many textbooks, especially Advanced Placement textbooks, define economics as: 

the study of how society manages its scarce resources.

 
Some textbooks add statements such as these:
 
  • how people decide what to buy, how much to work, save, and spend
  • how firms decide how much to produce, how many workers to hire
  • how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs

The above definition and three bullet points are from the “premium PowerPoint” in the resources for Greg Mankiw’s Principles of Economics.

What’s the problem with the initial textbook definitions? Society doesn’t decide how to manage anything, individuals do. The first two bullet points are fine (a firm being a small group of individuals), but the third one goes back to society again. There aren’t any societies, even socialistic ones, that get together and decide things. That is a pretense, one that implies that some all-knowing entity (the government) can determine which economic choices are best for all or most of the people in a community. 

Bad definitions lead to wrong thinking about the economy, and that leads to trouble.

The best definition I have found is this one from Alfred Marshall’s book Principles of Economics:

a 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 wellbeing. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man.

Sounds very flowery and old-fashioned, I know, but it is from the early 1900s. Two things to know: wealth does not mean money or income, and it does not mention scarcity, which is in all of today’s definitions. I will talk about these ideas in a separate post.

Another good (and simple) definition comes from the Austrian school. This particular definition comes from the article series The Economic Way of Thinking by Dr. Ronald Nash, but is also found in works by Ludwig von Mises: 

Economics is best understood as the study or systematic investigation of the principles of human action.

What kind of trouble comes from wrong thinking? The first and most important, loss of liberty. The second, loss of wealth. Some other problems will be discussed later.

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