Confining economics, inspired by Ronald Coase

 An early definition of economics was given by Alfred Marshall.  He said economics is “a study of man’s actions in the ordinary business of life; it inquires how he gets his income and how he uses it.” Marshall first published his “Principles” in 1890.  It seems that much of what we know of economics has not changed much for the past 100 years or so.

 Here’s another definition, which is used by practically all the textbooks: Economics is the study of how to satisfy wants from limited (scarce) resources. This was thought to have been  articulated by Lionel Robbins in 1932 who thought that economics was the study of “human behavior as a relationship between ends and scarce means which have alternate uses.”  It is also often said that the “ends” or “wants” we talk about are “unlimited” because there is no limit to human desire.  Of course, you are free to argue that contentment can be had with a simple life, with no more than a jug of wine, a loaf of bread, and someone to enjoy life with.

 Another definition focuses on “social arrangements to deal with the production and distribution of economic goods and services” (proposed by George Stigler in1952).  Note that this definition is to some extent circular – how do we know what is “economic” as opposed to “non-economic”?  It also raises a follow-up question, what “social arrangements” are we talking about?  It turns out that they refer to how we organize an economy (which requires a definition of an “economy”)!

 Yet another definition in a standard textbook (by Gregory Mankiw, for example) is that economics is the study of how society manages its scarce resources.  This definition raises questions: Why should society “manage” its resources?  You can retort that, of course, we “manage” because we have certain “wants” or goals, and then we are back to the Robbins 1932 definition.  The idea of “management” is attractive if you are into studying “business administration,” which means you are still very much influenced by Marshall’s 1890 definition based on the “ordinary business of life.”

 When I first studied economics, I noticed that it almost always led to a story about incentives.  In other words, it tries to explain economic events by looking into what motivates humans in their decisions on what to produce and consume, how much to save, where to invest, etc.  I thought then, and still do, that economics was a little like detective work that involved following the money (or profit), or whatever it is that makes people choose a certain path or alternative.  It should be obvious by now that economics is a study of humans and not of aliens, stars, birds, bees, rocks, or minerals. This distinction has led to debates about the role of “free will” in economics, and how far economics can make profitable predictions.

 The incentive-driven path leads to a truly broad definition from Ronald Coase: Economics is the study of human choice.  Another authority (Richard Posner) mixes everything up by stating that economics is the study of human choice “in a world of limited resources and unlimited human wants.”  I like Coase’s definition because with it economics can be applied to a wide range of things. Thus, economics can be used to analyze crime and punishment.  Economics can explain decisions on whether or how many to have children, whether or why we believe in a supreme Deity, or why we elect A over B for town mayor or dog catcher.  Coase’s definition makes an economist an interesting figure who can poke his nose into just about anything that humans do!

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 Note: A useful reference to this topic is Ronald Coase’s 1975 conference paper on “Economics and Contiguous Disciplines,” published in the Journal of Legal Studies in 1978.

 

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