Economic activities may be, depending on the sphere in which they occur: (a) purely individual, when carried out by an isolated individual without connection to others; (b) family-based, when they occur within a household without external links; (c) social, when they extend beyond the family, which is the most common case. Each of these three forms constitutes a type of economy, understanding economy here as a set of economic activities. Thus, there may be individual economy, family economy, and social economy.
The word economy also designates the scientific study of these activities. Each of the three types corresponds to a distinct scientific discipline: there is, or could be, an individual economy, a family or domestic economy, and a social economy—the latter traditionally called political economy for historical reasons. Among the three, only the third exists as a science. Hence it is also called economic science or simply economics. After everything stated so far, it may be defined as follows: the science that studies human activities aimed at obtaining material goods, from the perspective of the relationship between cost and product, insofar as these activities give rise to social relations.
Evolution of Economic Thought
Economic activity is, of course, as old as humanity itself. It is natural that from the earliest times it provoked ideas and criteria regarding its explanation and orientation. Only the most significant approaches will be mentioned here, especially those that attempted to address economic activity as a whole. Although such ideas are ancient, they did not form a true economic science until recent times—barely two centuries ago. Until then, economic doctrines were generally applications of moral and political principles, often inspired by religion. Despite this, these doctrines are not without value, and some provide important elements for modern economics.
Man and Material Goods in the Economy
Man and his Needs.
The human being is the subject of economic activity. He must never be considered merely its object. At the same time, the human being is the purpose of economy. Economic activity must serve his subsistence and development—physically, intellectually, and morally—helping him increase his knowledge, improve his health, and strengthen his will, rather than degrading him in any of these aspects. Reality, of course, does not always follow these principles.
Human beings experience needs, which may be classified according to several criteria: according to the faculties in which they originate—physical or bodily, spiritual or emotional; according to whether they align with true human nature—normal or abnormal, the latter resulting from deficiencies of intelligence or will. Of these various kinds, economics concerns itself with physical and spiritual needs, whether normal or not, that are satisfied through scarce external material goods and/or actions typically compensated by such goods. These are called economic needs.
Economic needs may also be described as primary or first-degree needs—those essential for life, including food and shelter (the latter comprising clothing and housing). These are physical needs, not uniquely human, shared with all animals, and highly rigid.
Secondary or second-degree needs—also called “civilization needs”—include all others that humans experience, as well as food, clothing, and housing when consumed beyond a basic threshold. These may be physical or spiritual, are specifically human, and are less rigid, meaning more elastic.
Needs may be present or future; the latter arise from the capacity for foresight and constitute one of the motives for saving, which is highly important in economics. They may be concurrent—substitutable by other means, such as satisfying the need for recreation through reading, sports, or cinema.
They may also be complementary: one need gives rise to another. For instance, the need for housing generates needs for furniture and domestic service. Human needs are unlimited in their repetition and, above all, their variety. They change according to individuals, times, places, ages, education, customs, and environment. Generally, they tend to multiply indefinitely—a striking (though not always central) feature of human progress. Their impact on economic activity is evident.
But human needs are also limited in their capacity for satisfaction. This is precisely what Gossen’s Laws describe—laws of psychological nature with economic implications, formulated by German economist Hermann Gossen in 1854 in The Development of the Laws of Human Exchange. They state:
- “The magnitude of a pleasure, when it is continuously and uninterruptedly satisfied, decreases until it reaches satiation.”
- “Likewise, the magnitude of pleasure decreases upon repetition of the same satisfaction. Not only does it diminish, but it is initially smaller and of shorter duration each time.”