Many definitions of economics found in text books fall into this error of including virtually all intelligent behavior.
Not only are the objectives of action in fact a practical problem, as well as the means of achievement, but intelligent discussion of the means cannot be separated from the discussion of the ends.
Economics deal with the social organization of economic activity.It's the structure and working of the system of free enterprise which constitutes the principal topic of discussion in a treatise on economics.
The problems of organization arise only when different things are being done, in the furtherance of a common end, and in definite relations to each other, i.e, in coordination.
Organization is more than cooperation; organization means that various "organs" not only perform different functions, they also all act in a substantially continuous manner and in proper adjustment to each other.
Five main function of an economic system
(1) The function of fixing standards; the notion of efficiency
In a social system, people have to decide what to produce. Society finds it necessary or advisable to regulate the individual's regulation of his own want-satisfaction, to enforce a community standard of living. So the question is whose wants and which wants are to be given in preference.
The problem of standards or values occupies a key position in economics. The practical objective of economics is that of improving the social organization and increasing its efficiency. The correct definition of efficiency is the ratio between useful output and total output or input. (The extent to which the society produce what people want at the lowest cost.)
(2) The function of organizing production
The second step is that of actually putting them to use in accordance with the scale of values established. There are 2 processes:
<a> allocate resources to produce
<b> cooperation to reduce the ratio of effort and result.
(3) The function of distribution
When production is socialized, the separate productive contribution of one participant in the process cannot be directly identified or separated. The decision as to what to produce is closely bound up with the decision for whom to produce. Besides, distribution is the chief agency relied upon to control production and stimulate efficiency. (people respond to incentives)
Remuneration matters
(4) Economic maintenance and progress
progress refers to any persistent cumulative change, whether good or bad
<a> growth of population and cumulative change in its composition or education
<b> the accumulation of capitals
<c> technology improvement
Economic organization creates progress at a cost and progress in turn affects and changes the whole economic system.
(5) To adjust consumption to production within very short periods
Over short periods consumption has to be controlled and distributed with references to an existing supply or current rate of production, at the same time that adjustment of production to consumption requirements is being made as rapidly as practicable.
The reasons for organizing activity
Organized effort enables a social group to produce more of the means of want-satisfaction than it could by working as individuals.
The gain from specialization
One of the most interesting facts in regard to human society is the absence of definite structual specialization of individuals. Human organization is an artificial thing. Natural differences exist among human beings, and are taken advantage of in fitting individuals to specialized functions.
So one social problem is to discover such differences and utilize them as far as possible.
No man is omniscient, and every one possesses tacit knowledge, so specialization is a complement of knowledge.
The saving of time and effort in changing from one operation to another is the third gain from specialization.
Also, specialization means that we can undermine the disadvantage brought by the natural "unfair" allocation of natural resources. Territorial specialization.
Perhaps the very largest singe source of gain from the specialization of labor is that it makes possible the development and use of machinery.
The possibility of new jobs and technology and art improvement.
Social cost of specialization
It gives us more products, but in its effects on human beings it means a narrowing of the personality; impersonality.
The technical cost of assembly and distribution
The resulting interdependence of persons and groups.
Types of organization
(1) caste:Such a rigid society cannot get huge progress
(2) militaristic: loss of liberty and knowledge problem
(3) anarchy: externality and public goods and resources problem
(4) the exchange system (Capitalism)
The system of competition, private property, and free exchange. IT is automatic and unconscious; no one plans or ever planned it out, no one assigns the participants their roles or directs their functions. Each person in such a system seeks his own satisfaction without thought of the structure of society or its interests
Modern free enterprise is not like handicraft in medieval time. Nowadays workers produce nothing and own nothing, they can exchange nothing.The individual in fact gets his living, not by selling and buying or exchanging goods, but by selling productive services for money and buying with the money the goods which he uses.
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