Principles of Economics, Introduction to Economics, Classical, Neo Classical and Modern thoughts of Economics

Principles of Economics, Introduction to Economics, Classical, Neo Classical and Modern thoughts of Economics

In this post of Principles of Economics, Introduction to Economics, Classical, Neo Classical and Modern thoughts of Economics will be discussed in which classical thought represented by Adam Smith, Neo Classical by Alfred Marshal and modern though by Lionel Robins. At the end, of this post all previous papers questions of FBISE and other boards will also be presented for better understanding about questions pattern. This topic is very important topic for all students those who have economics as a subject of their course such as ICOM, BCOM, ADC, OLevel, ALevel, BS, BBA, BMS and other disciplines of financial, accounting and economic studies.

Principles of Economics, Introduction to Economics, Classical, Neo Classical and Modern thoughts of Economics

Introduction to Economics

Background of Economics

Ancient Mesopotamia, Greece, and Rome:

Early form of transactions can be traced back in Mesopotamian civilization in the form of trade, taxation and financial transactions.

Famous Greek Philosopher Aristotle discussed the concept of value, exchange and wealth.

Romans developed the market system, banking and legal structure of property and commerce.

Islamic Era Contribution towards Economics

Abu Ubayd al-Qasim ibn Sallam (770-837): He wrote “Kitab al-Amwal” (The Book of Wealth), discussed aspects of public finance, including taxation, state revenue, and expenditure.

Abu Yusuf (731-798): He wrote a book “Kitab al-Kharaj,” a treatise on taxation and land revenue, emphasizing justice and fairness in taxation.

Al-Farabi (872-950): Al-Farabi discussed the importance of economic well-being for achieving a virtuous society.

Ibn Sina (Avicenna) (980-1037): Ibn Sina wrote about economic matters, including the role of the state in regulating the economy.

Al-Ghazali (1058-1111): “Ihya Ulum al-Din” (Revival of Religious Sciences), Al-Ghazali addressed economic issues such as the ethics of trade, the importance of fair dealings, and the prohibition of riba (interest).

Ibn Khaldun (1332-1406): Ibn Khaldun wrote “Muqaddimah” (Introduction to History), where he analyzed economic and social factors affecting the rise and fall of civilizations. He discussed labor, production, and the role of government in the economy, laying the groundwork for modern economic theories.

In old days, people use the word “Oikonomous” for the household affairs management. With the passage of time this household affair oikonomous extended to the frontiers of countries and later this word Oikonomous came to be known as “Political Economy”

In 1770 many industries came in to existence in Europe. That event is known as industrial revolution. With industrialization, many problems also came up such as, unemployment, housing, transport etc. After arising these problems, it was felt that there is a need to address these problems. Due to this trigger different economists discussed the issues in their own way and perspectives.

There are multiple definitions of economics but here we can distribute these definitions into three groups:

  1. Classical School of though. (Economics is a science of wealth)
  2. Neo-Classical School of thought. (Economics is a science of material welfare)
  3. Modern. (Economics is a science of scarcity and choice)

Classical School of thought

Adam Smith’s Definition of Economics

Adam Smith is considered as Father of Economics. He provided foundational definition of Economics in his Book “Wealth of Nations” published in 1776. He belongs to Classical School of thoughts. They believe that Economics is a science of wealth. According to Adam Smith’s point of view, Economics can be defined as:

“Economics is a science which discusses the production of wealth, consumption of wealth, distribution of wealth and exchange of wealth”

Production of Wealth

Simply means how wealth is produced. There are four factors of production, land, labor, capital and organization. When these four factors combine with each other, they produce goods and services. These goods and services produce wealth.

Consumption of Wealth

Consumption of wealth simply means that how we spend part of wealth on our necessities of life.

Distribution of Wealth

According to Adam Smith, wealth is produced by combining four factors of production, land, labor, capital and organization and there are rewards for each of them, rent for land, wages for labor, interest for capital and profit for organization.

Exchange of Wealth

Exchange of wealth means that how wealth passes from one person to other and one country to other country by means of international trade.

Other Classical Economists about Economics

F.A Walker

“Economics is a science which deals with wealth”


“Economics studies all human activities which deal with wealth”

J.B. Say

“Economics discusses the activities which deal with wealth”

J.S Mill

“Economics is the science of production of wealth and distribution of wealth”

Objection Criticism on Classical thought about Economics

  • Moralists Ruskin and Carlyle named it as a memmon (evil, demon) science that promotes worldly desires.
  • Contemporary moralists considered it as science of bread and butter.
  • Objective of study of wealth is not mentioned.
  • Purpose of human activities as production, consumption, distribution and exchange of wealth is not cleared.
  • It makes the people greedy, selfish and unsympathetic

Response to Criticism

After analyzing above criticism, point is clear that critics took narrow meaning of wealth, they just considered wealth as money and they considered that all the people who are performing these activities are evil. This is not fair because struggle to fulfill basic needs of life is not unfair. Struggle to earn food and butter is not selfishness. Wealth itself is not a bad thing but its use may be bad or good. For example, if somebody is creating wealth in gambling or in any other unlawful activity, is wrong but its positive use to earn fair life needs is not only good but also direly needed. If there is no wealth, how can we build hospitals, universities, schools and perform other meaningful activities. It is a basic trigger of movement all around the world.

Neo-Classical thought of Economics

Alfred Marshal’s Definition of Economics

“A study of mankind in the ordinary business of life. It examines the part of individual and social action which is most closely connected with the attainment and use of material requisites of well-being”

This definition is often regarded as the best as it covers all of the actions that humans take to earn and spend their income & it provides link between wealth and welfare.A.C Pigou, Cannon, Clark and Pareto all the economists gave the definitions of economics in the same line so we can say that these are all the supporters of Alfred Marshal’s point of view.


  1. Ordinary Business of Life

According to Alfred Marshal, Economics is a social science which studies human behavior in a society so all those persons who do not take any part in the economic activities such as mad or mentally ill persons are excluded.

  • Analysis of Economic Activities

People perform multiple activities in a society and there are multiple subjects for each type of activity. For example, subject of sociology covers the social activities, Political science for political activities similarly economics is for economic activities.

  • Welfare of the Society

According to Alfred Marshal, basic objective is not to achieve and consume wealth. Wealth is only mean to achieve welfare of the society so food, shelter, clothing etc. should be produced on priority basis not the luxury goods.

  • Economics is a Social Science

Economics is a social science rather than individual centric. In economics, we examine individuals who live in societies where they both impact and are influenced by others.

  • Study of Physical Activities

This concept states that economics exclusively looks at tangible activities, as those performed by masons, carpenters, and other craftsmen. The work of educators, physicians, engineers, and other service providers has been disregarded.

  • Economic Aspect of Life

According to this definition, economics simply looks at the financial side of things, ignoring social, religious, political, and other facets of existence. The economic side concerns a man’s means of earning and allocating his money.

  • Attainment and use of Material Requisite

At this point Alfred Marshal follows the Adam Smith point of that economic activities are related to production of wealth and consumption of wealth in order to accomplish the objective of material welfare.


Professor Lionel Robbins harshly objected to Marshals’ explanation of economics. He identified the following definitional flaws:

1.Narrow Concept of the Subject

According to Marshall’s definition, only those activities that create material items are addressed in economics, and the service sector of the firm has been completely ignored. Marshall focused primarily on material welfare as a result of the material goods. This turned out to be one of the definition’s most contentious aspects.

2. Narrow Meaning of Wealth

Marshal’s explanation is categorical. Economic phenomena have been divided into material and non-material categories. However, the notion of economics simply acknowledges the satisfying of material requirements.

3. Ambiguity in Definition

Marshal did not clear the difference between ordinary business of life and extra ordinary business of life.

4. Welfare cannot be measured

As a mental state, welfare cannot be assessed statistically and is hence unquantifiable. It is impossible to quantify the precise quantity of wellbeing or to pinpoint the precise amount of satisfaction that may be obtained from purchases, performances, or activities. All that can be done is assume. For example, it would be very hard to determine, quantify, or even estimate the welfare benefit that two friends would make by buying the same good.

5. Economics is not Purely a Social Science

According to Marshals, economics is a social science. He asserts that while the topic is concerned with all individuals as members of society, a guy living in a forest is outside its purview. However, Robbins countered that economics is the study of all people, regardless of their social status. It is therefore preferable to refer to economics as “human science.”

6. Objection on Welfare

Marshal only focused on activities which promotes human material welfare but all other aspects are excluded those are not welfare oriented such as drugs, cigarettes, alcoholic drinks are excluded from the definition but keep in mind that they also give satisfaction to the persons who use them.

Modern thought of Economics (Economics is a Scarcity & choice)

Lionel Robins Definition of Economics

After Alfred Marshal, Lionel Robins gave his point of view about economics in the following way:

“Economics is a science which studies human behavior as a relationship between multiple ends and scarce means which have alternative uses.”

Different Aspects of Robins Definition

(1) Multiple Ends:

    It is universal truth that humans are always after their wants or they have simply unlimited wants and desires. One another truth is that human cannot satisfy all his/her wants but they try to satisfy most of them.

    (2) All wants are not equally important:

    All wants are not equally important for the human. For example, to buy food is more important than to buy a car so they make choices and priorities among them on the basis of importance.

    (3) Scarce Resources:

    There are two types of resources, real resource and monetary resource. Real resources are like food, T.V, Car etc. and monetary resources are income, money etc. Both resources are scarce or limited.

    (4) Alternative use of Resources:

    People use resources alternatively. For example, if you have Rs. 100 and you want to buy food, cloth and bicycle then you will select food on priority to buy with this limited amount and postponed other two for the future.

    Merits/Advantages of Robins Definition

    (1) Scientific View

      Professor Robins’ concept of economics is more scientific and realistic which is applicable to overall society as compared to Alfred Marshal’s view in which he created division of desires of material and non-material things.

      (2) Neutral

      Professor Robins’ definition is neutral in its nature. It is not the obligation on economics to differentiate the good and bad. Economics only studies the actions and their results in monetary way.

      (3) Comprehensive

      Professor Robins’ definition is comprehensive and clear engulfing realities that human wants are unlimited, there are scarce resources to satisfy these wants or desires and people make choices on the basis of preferences.

      (4) Universal

      Professor Robins’ definition has universal implications. All the realities discussed in the definition is applicable universally because all human have multiple wants, every individual and country has scarce resources and each and every one has to make choices.

      (5) Analytical

      Professor Robins’ definition is analytical in nature. It does not apply on particular time, place and people rather applicable to all times, places and people.

      Demerits/Disadvantage of Robins Definition

      (1) Not all resources are limited

        Professor Robins’ defined that resources are limited or scarce but not all resources are limited. In developing countries, human resource is increasing as time passes.

        (2) No Touch of Morality

        In Professor Robins’ definition, morality is ignored. As he said that we can produce anything that satisfies human wants but what justification can we produce regarding production of drugs and negative services.

        (3) Resources can be mobilized and increased

        Professor Robins’ claimed that resources are limited or scarce but branch of economics such as developing and growth economics studies this issue and give us ways to increase and mobilize resources.

        (4) Economics cannot be neutral

        According to Professor Robins’, economics is neutral science but in reality people wants to take advice about their economic problems and economics has to give solutions regarding economic problems.

        (5) Economics is not only a Science but Art

        According to Professor Robins’ economics is a science but it is also an art that changes the life of human being and has capability to develop resources and mobilize them.

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