Modern Economy, 2012, 3, 597-607
http://dx.doi.org/10.4236/me.2012.35079 Published Online September 2012 (http://www.SciRP.org/journal/me)
Defining Economics in the Twenty First Century
Bhekuzulu Khumalo
Private Researcher, Toronto, Canada
Email: bhekuzulu.khumalo@gmail.com
Received June 4, 2012; revised July 2, 2012; accepted July 10, 2012
ABSTRACT
Economics as a subject matter has been given a variety of definitions over the last 200 years, however all the definitions
have a similar concept that they lean towards, a general principle one can say. The definitions are not wrong, this paper
does not seek to prove that they are wrong, but only to show they where right for their time, a subject matter like eco-
nomics, though studied over the centuries only formally became a discipline in its own right in the last two centuries,
and as such is fairly young and as we know more there perhaps is a time to seek a definition for economics for the
twenty first century. This paper seeks to give such a definition in light of the increased understanding of economics or at
the least we have access to greater information concerning the discipline economics than say Adam Smith, Alfred Mar-
shall or Hayek. Take the definition by Samuelson, “Economics is the study of how societies use scarce resources to
produce valuable commodities and distribute them among different people”, though correct, is the definition sufficient
for the twenty first century and beyond, that is all this paper seeks to answer, for it is the definition of a discipline that
guides the readers thoughts. Th e objective of this paper is to simply reaffirm the modern definition of what is econom-
ics given we know so much more than 100 years ago.
Keywords: Definition of Economics; Knowledge; Modern Definition; Choice; Scarcity
1. Contemporary Definition of Economics
In the first week of one beginning their readings in eco-
nomics, they will be given a definition of economics. Pi ck
up any text book for the beginning reader in economics,
and in the first few pages one will be given a definition
of economics. This done because without a definition, it
is very difficult to understand the subject matter of what
one will be reading. A definition i s a road map so to speak.
A definition, both for the beginning reader and the experi-
enced reader, gives a subject matter direction and scope.
X is defined as this, if one reads this then they are read-
ing X. If something crucial is missing in the definition
then it will not be studied, or it will be relegated to a lower
position than it deserves, robbing the reader of a more
fulfilling understanding of the subject matter.
Take the textbook “economics” written by Ronald M.
Ayers and Robert A. Collinge [1]. They define economics
as, giving two interpretations, the first, “Economics ex-
amines how to make choices well.” They also say, “Eco-
nomics studies the allocation of limited resources in re-
sponse to unlimited wants.” To say economics examines
how to make choices well can be questioned due to the
nature of society, what is making a choice well, does ra-
tionality come into it, what is a rational decision, are
humans rational [2]? Milan Zafirovski of the University
of North Texas would not wholly agree with the concept
of rationality and wrote a compelling paper about the
confusions that arise with the concept of rationality. As
we will see on further reading of the paper, economics
examines choices, good or bad, economics can not really
say what a good or bad cho ice is, it can only demonstrate
the outcome of choice, that is economics as a science.
When one looks at the definition of rational in the dic-
tionary, we see the definition as “agreeable to reason;
reasonable; sensible; a rational plan for economic devel-
opment.” Immediately we are moving into ideology, wha t
is a rational plan for economic development? One would
get a different answer from different economists depend-
ing on their ideology, and political view point. For eco-
nomics to ever fully be a science, it has to it be able to
make a distinction between ideology and dealing strictly
with the material, it can not ever answer questions of
morality, that is not the purpose of science, a purpose of
science is to try and measure phenomenon, and under-
stand the property of phenomenon. Therefore to say that
economics examines how to make choices well is vague,
it would be better to say economics examines the results
of choices made and builds up “models” and logical sys-
tems that answer as best as possible what will likely hap-
pen when a certain choice is made, when a certain path is
taken, this is because what seems irrational to one, might
very likely be rational to another.
Take the choice of going to war as an example. One
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can argue that a war right now is necessary for long term
stability as the enemy will be fought now and eventual
victory will lead to greater living standards in the future.
Another can argue that it is a waste of resources, and ev en
if there is eventual victory, other societies that have not
wasted their resources on war but rather on means of pr o-
duction will in the long run b e better ab le to encro ach our
markets. Whose view point is the rational view point. Vic -
tory in a war might lead to a vassal state that will allow
the victor to take their resources and less than what is
considered “market” value, this additional resource might
very well boost the society to its previous position or eve n
better. However all can argue in the manner they see fit.
Empires are built by arms, arms collect tribute. Though
some say a pen is mightier than the sword, a piece of
paper can be burnt , i gn ore d o r s hut o ut .
However when we look at the second statement from
Ayers and Collinge, “economics studies the allocation of
resources in response to unlimited wants”, a fairly neu-
tral statement with no ideological input possib le. An eco-
nomist can say with no guilt fo r example to client A who
wants to take action X in policy for country 2 that, “if
you want to take action X, I am not saying the choice is
good or bad, however given the limited resources you
will have to give up this, this and that.” It can not be
disputed that a pure economists merely studies the allo-
cation of resources as will be reaffirmed later in this pa-
per. By virtue that economics studies, according to the
definition given by Ayers and Collinge, the allocation of
resources, it follows by implication as all should under-
stand after a few readings in economics that economics
deals extensively as its foundations with opportunity co sts.
This definition is generally in the standard modern defi-
nition of economics as we shall see. It is generally in th e
standard form of the definition of economics but there
are still some flaws.
It must be understood that the concept of unlimited
wants is not a modern concept but originates from the
Middle Ages in Europe and it can be disputed. Quoting
from Agnes Heller’s book, [3] the “Renaissance man”,
we see that this idea originated in the Middle Ages, “Ma -
chiavelli talks a g reat deal about th e boundless of human
needs and the impossibility of satisfyin g them, and about
the source of eternal discontent’. What is more, even the
opponents of Renaissance anthropology were unable to
escape from the influence of its general truths. Colet rec-
ognized that the intellect strives after the infinite and can -
not be satisfied, and that is why he wanted it restrained.”
It is interesting to note how after many sentences Heller
continues, “The insatiability of human needs stands in a
reciprocal relationship with th e limitless potential for the
development of human work (creativity). Not only does
production (work) grow quantitatively, and needs along
with itneeds are also transformed, and they expand;
new branches of production are accompanied by new needs
and vice versa.” One can not argue with Heller. On an-
other note, how comes billionaires with their insatiable
wants do not purchase all the variety of goods that are
available, this however is another argument for another
discussion.
Take the textbook merely entitled “Economics” written
by Paul Samuelson [4]. The 1992 edition defines econom-
ics the same as did the first edition back in 1948. Paul
Samuelson however makes clear in the 1992 edition that
there are many definitions of economics none really mor e
right than another because they are so similar. Samuelson
distils his definition of economics to a “…common theme.
Economics is the study of how societies use scarce re-
sources to produce valuable commodities and distribute
them among people.” There is very little difference be-
tween Paul Samuelson’s definition and the second defi-
nition given by Ayers and Collinge, and the many other
examples as cited by Samuelson in his 1992 edition of
his textbook Economics.
Other economists have been more broad than S amuel son
in their definitions of what economics is. This could be
that they did not want the beginning reader of economics
to get lost, so they most likely felt to include as much as
possible. Take the definition given by Richard Lipsey [5],
Broadly defined moder n eco no mic s co ncerns:
1) The allocation of a societys resources among alter-
native uses and the distribution of the societys output
among individuals and groups at a point in time.
2) The ways in which allocation and di stribution change
over time; and
3) The efficiencies and inefficiencies of economic sys-
tems.”
Lipsey covers all the definitions that most economics
give, but only part 1) can be considered the true defini-
tion. 2) and 3) are not true definitions, just concepts for
the beginning reader to grapple with so they understand
presumably what they are about to spend a large part of
their life trying to understand. Take definition 2) by Lip-
sey, “the ways in which allocation and distribution c ha nge
over time is more a process of economics, one who spe-
cializes in say trends, economic history, or economic phi-
losophy would be in terested in studying the chang es over
time. The changes in allocation and distri bution are largely
ideological, a change in the social system, a change in
the mode of production. When we look at the third defi-
nition, what is meant by efficiencies and inefficiencies in
an economic system, more garbage, is that efficient or a
sign of efficiency, the more the garbage the more it
means people have, but it could also mean environmental
degradation. Who is to say that the allocation of a resource
that way or this way is more efficient, more economical,
this is entering a moral dilemma, it is not the job of eco-
nomics to enter into moral dilemmas. It is when econom-
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B. KHUMALO 599
ics enters into moral dilemmas that it becomes a dismal
science, but economists like every other human being are
allowed to discuss issues of morality, indeed take a side
in issues of morality, but in their reading, in their scien-
tific writings, morality does not come into issue, it should
not be an issue. In simplest form economics should an-
swer the question if action A is taken, B will be the result.
However from reading most contemporary journals, most
economists have read economics for a reasonable time
seem to understand this concept.
Why are all these definitions of economics similar, yet
we must understand that the definition of economics was
not always so sophisticated. Alfred Marshall at the end of
the 19th century, when economics as a discipline was not
as sophisticated as today defined economics as [6], “the
study of peop le in the ordinary business of life.” True one
can say that is what economists do, because what ever we
do generally does have some economic implication, but it
is ordinary for human beings to cut their nails, should
economics study this, economics does not study sleeping,
yet if we do not sleep we will not be able to perform
economic functions, our brains will not b e able to handle
it. Alfred Marshall therefore was not wrong, his defini-
tion was opening the door to the modern definition of
economics, but it was just not sophisticated enough for
the twentieth century with the growth of economic knowl-
edge, should then the definitions we have today be so-
phisticated enough for the twenty first century.
In point of fact, before Alfred Marshall, say in the time
of Adam Smith, there was no such discipline as econom-
ics, people read po litical economy rather than wh at wou ld
today be considered economics. People in those read eco-
nomics in conjunction with politics, and philosophy. The
subject matter had not evolved enough to dispense with
ideology [7]. “Originally, political economy meant the
study of the conditions under which production was or-
ganized in the nation-states of the newly-born capitalist
system.” Therefore for those who read economics the defi-
nition has been changing over time, and this is expected
because of the nature of the discipline, it is new as com-
pared to say theological studies, mathematics, pure sci-
ences of which mathematics is the basis. Without mathe-
matics you can not truly have a science [6]. Jevons for
example defined economics as “the mechanics of utility
and self interest.” Yet today we have a fairly standard
definition, a core principle of economics that most read-
ers and thinkers of economics adhere to. This definition
can be found in contemporary dictionaries. Dictionary.
com defines economics as “the science that deals with
the production, distribution, and consumption of goods a nd
services, or the material welfare of humankind.”
The serious reader of economic history will of course
know where this definition originates from, it emanates
from the paper written by Lionel Robbins first written/
published in 1932 [8]. This paper was titled “An Essay o n
the Nature and significance of Economic Science”. This
paper built itself up to the definition of economics and
defended that definition. It must be understood to be a
good economist, one needs not have read this paper, how-
ever, it helps in understanding economics in the modern
context, modern being early twenty first century. Early
on in the paper Lionel Robbins starts by saying, “Every
act which involves time and scarce means for the achieve-
ment of one end involves the relinquishment of their use
for the achievement of another, it has an economic as-
pect.” It is clear that Robbins is discussing opportunity
cost, he does this in order for those reading his paper
understand what economics is, what it should be in any
instance, in order to build a firm foundation for the defi-
nition that he will come up with. Lionel Robbins contin-
ues, “…So, too, is the political economy of war. The wag -
ing of war necessarily i nvolves of t he withdrawal of scarce
goods and services from other uses, if it is to be satisfac-
torily achieved. It has therefore an economic aspect. The
economist studies the disposal of scarce means.” By
telling us what an economist studies, Lionel Robbins is
setting the reader up for the definition of economics wh i c h
he does a few sentences later. “Economics is the science
which studies human behavior as a relationship between
ends and scarce means which have alternative uses.”
From this definition offered by Lionel Robbins springs
the contemporary definition of economics though differ-
ent economists right it differently, bu t they are all saying
more or less what Lionel Robbins said back in 1932.
Lionel Robbins continues in the paper to justify the
definition that he has just given, and make sure people
understand the only way he feels that economics can
truly be a science. “It follows that economics is entirely
neutral between ends; that, in so far as the achievement
of any end is dependent on scarce means, it is germane
to the pre occupations of the economistit should be
clear therefore, that to speak of any end as being itself
economic is entirely misleading.” This last statement
from Robbins cements economics the discipline as a sci-
ence. Yet to this day one will hear people who are con-
sidered, and consider themselves well read in economics
talking of this being more economical than that, even in
lay man’s language it is wrong. Economics as a disci-
pline does not deal with a decision being more economi-
cal than another decision, it did however in the 19th and
pre 19th century era., it should not today, if and only if it
is taken as a science, a process that Lionel Robbins ob-
viously was hoping to aide by writing the paper h e wrote.
The econom ist is no t con ce rne d with ends as su ch. He
is concerned with th e way in which the attai nment of en ds
is limited. The ends may be noble or they may be base.
They may bematerial or immaterial’—if ends can be
so described. But if the attainment of one set of ends in-
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600
volves the sacrifice of others, then it has an economic as-
pect.” This statement by Lionel Robbins is the basis of
reading economics, to understand as scientifically as pos-
sible the implications of choice, of a choice given limited
resources, otherwise one reads and discusses political
economy rather than economics.
Understanding the foundations of the modern defini-
tion of economics, we can ask ourselves a certain ques-
tion. Given Paul Samuelsson’s definition of economics
that, “that economics is the study of how societies use
scarce resources to produce valuable commodities and
distribute them among different peop le,” this definition is
in principle correct, as is the definition from the diction-
ary, however, given that we know more about the eco-
nomic process, are these definitions sufficient?
2. What Was Seen but Not Acted upon
[6] “Quesnay had propounded a school of economics
known as Physiocracy and devised a chart of the econ-
omy called a tableau economique. The tableau was truly
a physicians insight: in contradistinction to the ideas of
the day, which still held that wealth was the solid stuff of
gold and silver, Quesnay insisted that wealth sprang from
production and that it flowed through the nationBut
the trouble with Ph ysiocra cy was that it in sisted that on ly
the agricultural classes produced true wealth and that
the manufacturing and commercial classes merely al-
tered its form in a sterile wayin describing the indus-
trial sector as performing only a sterile manipulation, it
failed to see that labor produced wealth wherever it per-
formed, not just on the land.
To see that labor, not nature, was the source of value
was one of Adam Smiths greatest insights. Perhaps this
was the consequence of having grown up in a country tha t
bustled with trade, rather than in the overwhelmingly
agricultural setting of France.” (Heilbroner).
Wealth obviously does not come from bullion, or fiat
currency for that matter. Bullion and only has value be-
cause it can purchase something, with no production gold
and silver have no claim on wealth. The physiocrats at
the least understood that wealth comes from production.
Man values what men has produced, man values what ha s
a use to him, food, this must be cultivated, other goods
must be manufactured, Adam Smith understood this mor e
of course than the physiocrats. What comes from nature
without men’s actions has no monetary value. What are
these actions, they can either be more physical or more
mental, designing a manufacturing plant and equipment
is more mental than physical, whilst packing the manu-
factured goods into boxes is more physical. Even the
bullion that has been valued throughout history is not
valued in the gr ound, man must act upon it to create bul-
lion and coins.
Humans do not just act blindly when they act upon
nature, labor does not just act blind ly when th ey produce,
they must know what they produce, they must know how
to produce it. Humans need knowledge. One could sense
by the way Quesnay and Adam Smith attributed value to
labor, to human action that they could understand that it
is knowledge, but because of the w ay knowledge was my s -
tified in this time period, they could grasp it, but left it
out, there was not enough theoretical foundation to dis-
cuss knowledge as a commodity, as the primary commod-
ity that creates all other commodities.
Over half a century would pass after Adam Smith’s
classic book, “An Inquiry into the Nature and Causes of
the Wealth of Nations”, that an economist and philoso-
pher would understand the power of knowledge in eco-
nomics, that we must know how to before we can give
anything value. This economist philosopher would be
John Stuart Mill. It must be understood that Adam Smith
in particular did not ignore knowledge, he just left it as a
philosophical opening, knowledge was mystified, it was
not materialized so to say. Knowledge was not looked at
as it is, that something was something, the European phi-
losophers at the time were engaged with separating k no wl -
edge from the mind. For example engaging in asking
somebody does a falling tree make a noise if you are not
there to hear it, such thoughts are totally removed from
any scientific scrutiny, in fact taking knowledge in that
sense it is impossible to make any scientific scrutiny of
knowledge. For example in January 2010 there was a de-
structive earthquake in Haiti. If I did not see it in the me-
dia does it mean it never happened, it is nonsensical de-
bate. It is because of such thoughts on knowledge that
though people like Adam Smith, Quesnay could see it,
the philosophy of the day meant they could not grasp it.
Even to this day those who are bemused by knowledge,
hope everybody else is bemused because they are.
John Stuart Mill seemingly was one of the first to pub-
lish and realize the power of knowledge. Knowledge has
always been the primary commodity, however because
change was slow, people then took knowledge for granted.
It was the industrial revolution when change became fast
that one could see the power of knowledge in action, it
no longer was a mystery it was there for all to see, for
those who wanted to see.
[9] “Of the features which characterize this progres-
sive economical movement of civilized nations, that whi ch
first excites attention, through its intimate connexion with
the phenomenon of production, is the perpetual, and so
far as human foresight can extend, the unlimited, growth
of mans power over nature. Our knowledge of the prop-
erties and laws of physical objects shows no sign of ap-
proaching its ultimate boundaries: it is advancing more
rapidly, and in a greater number of directions at once,
than in any previous age or generation, and affording su ch
frequent glimpses of unexplored fields beyond, as to jus-
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tify the belief that our acquaintance with nature is still
almost in its infancy . This increasing physical knowledg e
is now, too, more rapidly than at any former period, con-
verted, by practical ingenuity, into physical power. The
most marvelous of modern inventions, one which rea lizes
the imaginary feats of the magician, not metaphorically
but litera llythe electro-magnetic telegraphsprang into
existence but a few years after the establishment of the
scientific theory which it realizes and exemplifies.” (Mill).
Clearly from reading the above quotation from Mill,
we see a profound ad miration for knowledg e, and a clear
understanding that it is knowledge that is creating the great
transformation of Mill’s time. Mill seemingly grasped the
concept that the increasing knowledge base of the laws of
existence, laws of the material, which he called physical
knowledge is seemingly unlimited, and at his time hu-
manity was just at its infancy in beginning to understand
thess laws of the material [10]. It is only limited by the
concept of konke, konke being a point were a society or
being knows everything, where all knowledge becomes
timeless because it is all in easy grasp, the knowledge is
there. However one can go further and say Mill in the
above quotation though not fully comprehending, under-
stood that the more timeless knowledg e becomes, simply
the more society knows, the more likely the modes of
production and living will change. Whatever else can be
said about Mill the above quote illustrates of how adva n ce d
he was for his time, he understood the key element and
according to him it is the element “...which first excites
attention, ...” Though understanding knowledge and it’s
process seemingly more than other economists of his ti me ,
he did not need to call those that turned the laws of exis-
tence, what he termed physical knowledge, into useful
products are not magicians, especially literally maybe
metaphorically, they are just people who understood how
to use those laws and create useful products for other hu-
man beings. Mill however must be credited with putting
this information, this observation on pape r.
Therefore, one can say with confidence that the likes
of Quesnay, Smith, and Mill all understood, though ob-
viously because of increased th eoretical frame work, Mill
understood more and all had it in the back of their mind
that it is the quality to gather knowledge, innovation can
only spring forth from knowledge, from understanding
the laws of the material. It would however be a great mis -
take to suggest that Mill, Smith, Quesnay, Schumpeter
understood knowledge in a scientific manner without mys-
tifying it. Mill thought they where literal magicians. Even
Hayek’s paper on knowledge was far from a scientific
enquiry into knowledge. That branch of economics that
deals with knowledge as an economic science is knowl-
edge economics.
There is a philosopher however who did first link know-
ledge and economics 2500 years ago. However he wrote
in pros and verse. His name was Lao Tzu, he just had one
sentence to say [11]. “The more skills the people have the
further the novelties multiply.” Straight to the point, skills
are a direct result of applicab le knowledge, th e more kno w-
ledge, the more skills, the more goods will multiply, the
more novelties will multiply. Today there are a variety of
goods available in the world for those with money, more
than any other time in history, and this increase in goods/
novelties seemingly will continue for the foreseeable fu-
ture with glitches here and there. These novelties/goods
increase because societies that produce them more or less
follow the laws of knowledge, this again is for another
discussion. However it must not be forgotten that Lao
Tzu to most extent also mystified knowledge, but it is
expected, it was 2500 year s ago.
By the twentieth century the most original economists
understood the power of knowledge and others where no
longer afraid to take risks in discussing knowledge [12].
Veblen can easily be considered one of the most original
minds in economics. “...what Veblen called a societys
immaterial equipment’,” [1915, 272] is far more valu-
able than the material equipment. In a passage about the
California Indians, Veblen wrote that:
The loss of the basket, digging stick, and mortar, sim-
ply as physical objects, would have signified little but the
conceivable loss of the squaws knowledge of the soil and
the seasons, of food and fiber plants, and of mechanical
expedients would have meant the present dispersal and
starvation of the community.
With the right knowledge lost material equipment can
be replaced. Without knowledge, we are incapable of pro-
ducing anything. Moreover, without the knowledge of how
to use them, the most advanced machines and equipment
are useless.” (McCormick).
Ken McCormick in the above quote is trying to alert
the reader of how Veblen was ahead of his time in his
economic thought. Veblen above is clearly putting know-
ledge on the pedestal that it belongs on. Without knowl-
edge not only will the California Native Community s ta rv e
but the whole world would starve. Not only are the most
advanced machines and equipment useless without the
knowledge to operate them, the most advanced machines
and equipment need knowledge to create them.
Dale Neef in his book [13], “The Knowledge Econ-
omy” as recently as 1998 again misunderstood knowl-
edge, taking knowledge as a new phenomenon in eco-
nomics. Clearly Veblen in 1915 understood more than Dal e
Neef who thinks that “‘the knowledge-based economy
describes the ever-increasing proportion of the nations
GNP dedicated to computerization and high-technology
electronics industries.” The economy has always been
based on knowledge, human survival has always been
based on knowledge, something that the likes of Veblen
understood, in another way the likes of Neef are again
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B. KHUMALO
602
trying to mystify knowledge, it only started with the
computer age, totally a wrong concept of knowledge.
However, Neef seems to confuse himself when he says,
I define knowledge in terms of potentially observable
behavior, as the ability of an individu al or group of indi-
viduals to undertake, or to instruct or otherwise induce
others to undertake, procedures resulting in predictable
transformation of material objects.” This clearly has been
going on throughout history, therefore the knowledge eco -
nomy can not just h ave arrived in the last 50 o r even 300
years. Hence the emergence of Knowledge economics, a
discipline that understands knowledge as a prime resour ce
since mankind existed, not a new phenomenon. Only som-
ebody who understands knowledge can understand that
the law that governs additio n is equal in terms of knowl-
edge to the law that defines energy or motion, though one
might put different economic value on each law, they are
essentially equal, so called knowledge economy can not
understand such a concept though widely promoted.
In his book “The Road to Serfdom” [14], Hayek said:
This interaction of individuals, possessing different know-
ledge and different views, is what constitutes the life of
thought. The growth of reason is a social process based
on the existence of such differences...” then Hayek goes
into political thought. Hayek clearly understood the proc-
ess of the knowledge process in society and why free-
doms must be guaranteed. Hayek of course was mainly
concerned with the encroachment of big government and
used knowledge as a defense for greater freedoms on that
score he was right, he understood the laws of knowledge
though not laying them down in poin t form.
Earlier on in the book Hayek said [14], “The question
is whether for this purpose it is better that the holder of
coercive power should confine himself in general to cre-
ating conditions under which the knowledge and initiati ve
of individuals is given the best scope so that they can pl an
successfully; or whether a rational utilization of our re-
sources requires central direction and organization of all
our activities according to some consciously constructed
blueprint’.” Again Hayek recogn izes the power of know-
ledge, he is however not making a scientific analysis of
knowledge but using the power of knowledge to make a
case for greater freedoms.
3. Towards a Twenty First Definition of
Economic
Paul Samuelson it can be recalled from earlier on in this
paper defined economics as [4] “the study of how socie-
ties use Scarce resources to produce valuable commodi-
ties and distribute them among different people.” This
definition is derived from the definition that Lionel Rob-
bins so eloquently defended in his 1932 paper. Paul Sam-
uelson’s definition however is sufficient for the purposes
of this paper.
Samuelson and other economists before understood
that resources are scarce and that this must be included in
the definition of economics so that the aspiring reader of
economics will always have this fact in the back of their
mind. As resources are scarce and by their nature usually
have more than one use, the concept of opportunity cost,
again well laid out by Lionel Robbins in his works enti-
tled “An Essay on the Nature and Significance of Eco-
nomic Science.” What is a resource? The answer might
seem obvious but it is better to investigate and be as clear
as possible what a resource is. We can easily understand
land, labor, and capital as resources. However, these re-
sources to be resources must be able to produce valuable
commodities, either by working on another commodity
or being worked upon. Humans for example work on the
land to produce valuable commodities, yet both humans
and the land are considered resources. Every commodity
in part comes from the land, the other part is humans wo r k -
ing on what comes from the land. By working on the la nd
they are either cultivating it or extracting minerals from it,
or using the land to place capital, creating plants, mills,
factories all in order to create valuable commodities suit-
able for human demand. A television for example has
plastics processed from crude oil, copper wires, glass, all
these things though coming from nature, in nature they
are not suitable for human consumption, they must be
processed. All material comes from nature even the “man
made” material must be processed from material occur-
ring in nature, a man simply alters the material form.
Before humans can create or convert anything into a
commodity they must first identify the material that can
help convert something into a commodity [10]. For ex-
ample, take sandy soil, this type of soil is of no use for
humans to say cultivate plants. The human must be able
to identify tha t this t ype o f so il wil l no t be a g reat resour c e.
However, thick black soil is considered a premium re-
source for agricultural purposes, the human being must
be able to identify that this type of soil is a premium ag-
ricultural resource. One can make another example, sand
though a part of the land is usually not considered a
natural resource, however, black soil, iron ore, crude oil,
platinum. Copper and yttrium are considered natural re-
sources. That is the reality of human existence, some ma-
terials are considered natural resources other materials
are not, why is this? The answer is simple, some materi-
als have use for human beings some materials have no
use. Iron ore is considered a resource only because of
the knowledge humanity possesses about the properties
of iron. It is a question of knowledge.
Human beings of the era of sword and spears identi-
fied iron as a resource but did not value crude oil, they
had no use for it, though the crude oil was still there un-
der the ground. Crude oil has been under the ground for
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B. KHUMALO 603
millions of years or billio ns depending on the theory one
beliefs in about the formation of oil. There is the Western
theory that oil is from dinosaurs and the Russian theory
that oil is naturally occurring for billions of years just
like one finds iron ore, and gold in nature, oil is accord-
ing to this theory a part and parcel of the world, if it came
from dinosaurs why it is not everywhere. This cold war
debate is not part of this paper. However, the critical le vel
of knowledge possessed by humans to see crude oil as a
resource occurred very recently in human existence; re-
cently considering that scientists believe homosapians
originated some 200,000 years ago. Yttrium, like crude
oil, has fairly recently becomed a new resource, yet, yt-
trium, like iron ore has been in the ground for billion s of
years. Humans only recently achieved the critical level of
knowledge to see that yttrium can be a resource.
It should be clear now that it is human beings who
identify a resource, they identify this resource through
knowledge. What is not a resource today can very well
be a valuable resource in the future because of the grow-
ing knowledge base. Therefore not all materials are re-
sources, but all materials are potential resources that can
be commodified, that is can be made into a commodity
and commercialized because they have a use for mankind.
It follows that not all humans can be considered a re-
source, but all humans are a potential resource for a so ci-
ety. People are resources because of their abilities, and
all ability over and above physical power comes from
knowledge. Physical streng th without knowledge of what
to do is meaningless. Therefore not all humans are re-
sources without the concept of knowledge been added,
understanding this power of knowledge in economics, it
follows that a twenty first definition of economics must
point the reader of economics the necessity of identifying
resources, just as a definition must point out resources
are scarce.
That it is understood that it is knowledge that allows
us to identify a resource and to commodify the material
and understand that this process has always been going
on leads one to reject the claims of Robert Heilbroner
and Lester Thurow, who in their book [15] “Economics
Explained”, seem to believe that the knowledge worker is
a new phenomenon. Knowledge has always been a key to
the survival of human beings. One therefore needs to ana -
lyze knowledge as a commodit y , then and onl y t hen would
one understand knowledge in a scientific manner, under-
standing the properties of knowledge as one understands
the properties of any other commodity like, tea, coffee or
platinum. Then it is possible to understand the change in
the mode of living is highly correlated with the knowl-
edge base of a society. Change in mode of living being
the evolving economy.
Understanding this, a twenty first definition of, using
Paul Samuelson’s defin ition as a guide will therefore r ead
as: Economics is the study of how society’s use knowl-
edge to identify resources and use these scarce resources
through knowledge to create commodities. Th is of cou rse
is not a final definition merely the first part of a contem-
porary definition.
Note at this point for some finding the definition above
difficult to comprehend, the easiest way to comprehend
knowledge as a commodity is to take and understand
what Bertrand Russell meant by what he considered facts.
Take the theory and expand on it then one can take kno w-
ledge as any other commodity where they can add know-
ledge and theoretically calculate bow much knowledge
the world has. But the importance of this can only be
understood if the definition of economics does not exclu d e
knowledge, remembering that it is the definition of a dis-
cipline that guides out readings, writings and thoughts on
that discipline.
To continue with the paper it is important to look at
probably the most modern definition of economics at
present. The definition can be found from the Vanderbilt
University website, www.vanderbilt.edu. They it seems
in association with the American Economic Association,
give a simple and easy to comprehend definition; [16]
economics is the study of how people choose to use re-
sources.” Then they explain what they mean by resources,
Resources include the time and talent people have ava il-
able, the land, buildings, equipment, and other tools on
hand, and the knowledge of how to combine them to cre-
ate useful products and se rvices .”
The definition of what a resource is from the Vander-
bilt University is important because of two key elements,
it includes the concept of time and knowledge. Both key
concepts have a more meaningful understanding and ap-
preciation of e con omics.
The definition from Vanderbilt University does how-
ever miss an imperative consideration. In their definition
of what is a resource, they say rightly that, “...and the
knowledge of how to combine them to create useful prod-
ucts and services.” It is accurate to say knowledge is
needed to combine resources to create useful products a nd
services, but it is not enough. It is also knowledge itself
that is used to identify and create resources, therefore,
knowledge itself is the primary resource and catalyst in
every process of the economic process. The best defini-
tion in of what resources are, that from Vanderbilt Uni-
versity is association with the American Economic Asso-
ciation, misses th is crucia l reaso ning. W hy is this so, la n d,
which land, that takes knowled ge to answer that question.
The question of how can only be answered by accepting
the answer knowledge. All equipment is crea ted by k no w-
ledge, how to create it and how to use it takes knowledge.
A building takes knowledge to build, the more complex
the more knowledge input will be needed, the output for
anybody who understands can at most be equal to the
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604
input, but usually less than the input, knowledge is usually
less than the sum of its parts, that is just the way knowl-
edge is.
Take the richest human, or even the richest nation at
this point in t ime, they can not fly to Mars, or to the nea r-
est star, why, because the resources have not yet been
identified. The material is probably there, but humanity
does not yet have the critical l evel of knowledge to iden-
tify the materials that could create resources for inter-
planetary travel at the moment, therefore that resource
does not exist. Society can not demand or supply a resource
that has not yet b een identified by the human mind.
Comprehending these concepts, economics can accord-
ingly be defined as: economics is the study of how hu-
mans use knowledge to identify resources and use these
scarce resources to create, using knowledge, commodi-
ties and distribute them among people. What a resource
is was given to us by Vanderbilt University and the A me r i-
can Economic association, “resources include the time
and talent people have available, the land, buildings, equip-
ment, and other too ls on hand, and the knowledge of how
to combine them to create useful products and services,”
there a few better definitions of what a resource is than
this one.
From the on set the reader of economics will under-
stand how important knowledge is. One can only hope
from the above definition that the aspirant reader in eco-
nomics will understand that resources are identified by
the human mind before they become resources. Compute r
software is now such an important resource, id entified by
the human mind and turned into a commodity, now it is
difficult to imagine a world without computer software.
The aspirant reader will understand that it is knowledge
that creates commodities, when they become well read
economists they can advocate the importance of knowl-
edge to a society to create better commoditie s in order to
contribute to human society, humans generally prefer the
better products for the same amount of money. The defi-
nition hopefully will lead to future societies that respect
knowledge and it’s laws. Knowledge being the very thing
that allows societies to progress in a material sense.
This definition given above, because it acknowledges
knowledge as the driving force of material progression,
answers some of the critics of definitions of economics
that are derived from Lionel Robbins, that of course in-
cludes the definition from Paul Samuelson, the main criti-
cism it answers are those concerned that Lionel Robbins
definition of economics is static. The above definition,
(one must not forget that this definition is too a progres-
sion from Lionel Robbins’ definition of economics and
accepts the arguments from Lionel Robbins concerning
what an economist is and studies), can not be static. The
process of identifying resources is not static, there is an
action involved, the action of identification, an action im-
plies non static, an action implies change.
This definition could very well also fall into the criti-
cism that it ignores ethical aspects, and rightly so. Eco-
nomics should not delve into how humans should behave,
for that one would need to read the many philosophers
past and present, one could read a book on ethics, for if
economics starts to deal with ethics, it falls into traps that
it can not answer in any meaningful way. Economics mus t
deal strictly with analyzing the results of policy, laying
solid theoretical groundwork on analysis of commodities.
It was explained above that Lionel Robbins said an e con o-
mist can never talk of this or that action been econ omical,
because what does economical mean. Take for example a
horrid dictatorship, a society that closes itself from the
outside world with what most would consider despicable
poverty and human rights violations. But who is this pol-
icy uneconomical for, for the majority who are poor they
can say it is uneconomical. But for the ruling elite the
policies are very economical, immoral maybe, according
to one’s morals, but uneconomical, they would be mak-
ing a lot of money. Slavery was very economical for
slave owners, uneconomical for the slave. Subsidies are
economical for some, uneconomical for others the econo-
mist can only point out that subsidies divert resources.
Lionel Robbins paper is very important and relevant to
this day, economist is first and foremost one who deals
with how resources that are normally scarce are distrib-
uted, an economist is not a linguist or language expert, is
not a biology master, or a master of physics, an econo-
mist does not talk in a serious manner on things being
economical.
Having discussed the definition how does it for exam-
ple help with economic concerns of this day and age.
How does one stimulate an economy for example? Look-
ing back at the definition, it possibly guides one to think
of introducing new knowledge, new commodities, intro-
duction of new resources is not as easy. Introduction of
new commodities begins the cycle over, people purchase
what they already do not have. New energy, new trans-
portation, new ways, all these stimulate new demand and
in the long run as has been d iscussed by knowledge e co n o -
mists who discuss the behavior of knowledge in the short
and long run, once there are new commodities, a new short
run behavior of knowledge kicks off, introducing new
commodities is definitely a sign that so ciety has entered a
different short term knowledge model.
What about the question of African aide and investment .
Understanding that it is knowledge the main driver of
economics, one can sum up the African problems as not
respecting the laws of knowledge, the laws th at allow th e
knowledge base to grow in a society, wh en knowledge is
treated for what it is, the primary resource and primary
commodity. Not just Africa but the other poor regions.
However, the question of politics comes into play, the
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B. KHUMALO 605
society must be willing politically an d ideology to fo llow
as much as possible the laws of knowledge. One must not
forget that the Russians for example have tremendous
amounts of knowledge, first people in space, first satellites,
however they failed to put their knowledge into the mar-
ket one could argue because of their political syste m they
could not. Therefore having the knowledge without fol-
lowing all the laws of knowled ge will not likely lead to a
wealthier society. Returning to the question of Africa,
Africa must understand that it is people who are the main
resource, would platinum be a resource if the mind had
not deemed it so, would oil for that matter, it is humans
who identify resources and Africans must be allowed to
identify resource and create commodities, not just in
speech but in deed.
Take the question of international trade. At its basis it
is just an exchang e of knowledge, goods are the result of
use knowledge, that is to say knowledge that has been
transformed to meet the needs of humanity. Exchanging
knowledge can not be a b ad thing , intern ation al trad e the-
refore should be encouraged, this way the knowledge ba se
of humanity increases, as each society seeks knowledge
and shares its knowledge in the market place. However
this paper was merely written to encourage a more mod-
ern definition of economics in order to stimulate tomor-
row’s readers of economics.
4. Application of Definition to Economic
Thought
Economics is the study of how humans use knowledge to
identify resources and use these scarce resources to cre-
ate, using knowledge, commodities and distribute them
among people, this is the most appropriate definition
given all the analysis in this paper. The applications
should be clear from the above paragraphs, the seven
paragraphs preceding. One immediately understands the
concept of knowledge as been central to human material
development. Governments then should understand that
they must make societies free for people to use their
knowledge, because it is their knowledge that is the pri-
mary resource, if they are not allowed to use their
knowledge how society will progress. Governments can-
not feed all the people, people given the freedom to use
their knowledge will find ways to feed themselves.
When it comes to development economics, it will be
clearly understood that economics is just economics, allow
people to use their knowledge and in time society will
develop, because people are allowed to use their knowl-
edge. Billions of dollars have been poured into Africa,
Latin America, and many smaller Asian countries yet
there has been no progress. Yet if people are made free to
use their knowledge, and seek to increase their knowl-
edge they will find ways to surviv e and create goods and
services. The key missing aspect was the understanding
of the power of knowledge.
One can only admire Germany after the second world
war. Germany was split into two countries, West German y
controlled by USA, Britain and France, and East Germany
controlled by the then USSR. The two peoples are Ger-
man and had similar knowledge, yet in the 1950’s West
Germany began rapid economic expansion that continued
for decades, whilst East Germans economic expansion
lasted for a few years immediately after world war 2. W h y
is this, when obviously after the war they both had equal
knowledge? It is because the West German government
relaxed controls on people’s ability to use knowledge.
China’s economic expansion since the visionary Deng
Xiaoping is a direct result of allowing people to use their
knowledge, to find ways to feed themselves rather than
burdening the state with plann ing for minute d etails. This
way China’s knowledge has grown step by step, until
now they are one of the three global space powers in-
cluding Russia and the USA.
Understanding it is about knowledge, pouring billions
of dollars into countries that do not adhere to the princi-
ples of knowledge is really a waste of money, that money
will just disappear to know where. Knowledge is respect-
ing that everything takes time, especially economic de-
velopment, as knowledge is built upon knowledge, it how -
ever takes a great visionary like Deng Xiaoping, Konrad
Adenauer, to get the process started, both understanding
this is a long term plan for their peoples.
Having knowledge as such does not itself guarantee
great economic success, it is allowing people to use their
knowledge, Russia is a leader in many fields, yet as an
economic force it is not where it should be, why, tis has
to have something to do with allowing people to use their
knowledge.
Take resource rich countries, for a most part all they
do as extract resources and sell them. In most instances
this countries are static in cases of scientific inquiry, un-
derstanding and appreciating knowledge could very well
change their attitudes, that they can be more than just
resource providers, they can participate at a deeper level
in the global economy.
Maybe it is time to offer development aide to coun tries
that free up their people to use their knowledge, otherwise
it will be just the same, countries will just not develop.
Most importantly as we approach the understanding that
we all share this earth, and we are all human beings, and
that greater knowledge is for the benefit of all mankind,
we will accept facts for being facts regardless of where
those facts come from, we will depoliticize knowledge so
to speak. This way human beings will all accept each
other as just human beings with the capability for all to
think. But then again this is a top ic for political economy
and philosoph y rather than economics per se.
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606
5. Towards Defining Knowledge Economics
Returning to the definition of econom ics as explained above,
economics is the study of how humans use knowledge to
identify resources and use these scarce resources to cre-
ate, using knowledge, commodities and distribute them
among people”, we can now define what knowledge eco-
nomics is. Knowledge economics is the study of knowl-
edge the resource: the properties of this resource and
how knowledge affects the mode of living. Knowledge
economics does not yet have a JEL classification number,
I propose, S, and S0 will be for the general category.
When somebody reads knowledge economics or tries
to enhance it they understand from the onset that knowl-
edge is the primary resource, they want to learn its prop-
erties and use these properties to make economic deci-
sions. They also to be complete as knowledge economists
want to understand how knowledge affects the material
change, the changes in he modes of production and living
caused by changin g kn o wl e d g e base .
This paper was written simply to determine a defini-
tion of economics relevant for the twenty first century, to
give the aspirant reader in economics a clear road map. I
am sure in my historical analysis I missed a lot of great
thinkers on knowledge, two in particular comes to mind,
Paul Romer. Romer was ahead of his time in his thoughts,
and if in the mid 1980’s there was a paper dealing with
the properties of knowledge, the behavior of knowledge,
a theory concerning how to count knowledge, Romer
would have been profoundly more successful at includ-
ing knowledge in an economic model that would have
been widely accepted, the second is Porter whose influ-
ence can be felt in the paper, a reader of economics who
understood that it is [17] competitive advantage that giv es
a nation the edge, and the competitive advantage mostly
comes from knowledge; but for the purposes of this pa-
per the main drivers of knowledge in economics have
been included.
There are other works that have influenced this paper
but not directly quot ed of course, t he works of [18] Dewer,
[19] Warsh, two great works by Hayek but not directly
quoted but very influential [20], “The Use of Knowledge
in Society” and [21] Hayek on Hayek. Another influen-
tial thinker of this paper would be Dopfer and Potts with
their works [22], “The general theory of economic evolu-
tion”. This paper is a follow up of the research no te writ-
ten earlier with the same title [23], “Defining Economics
in the Twenty First Century”, and is influenced by past
works by Bhekuzulu Khumalo namely [24] “The Variable
Time, Crucial to Understanding Knowledge Economics”.
6. Conclusion
Economics is the study of how humans use knowledge to
identify resources and use these scarce resources to cre-
ate, using knowledge, commodities and distribute them
among people. This is an appropriate definition of eco-
nomics given how far the discipline has come. It includes
in the definition the very importan t concept of scarcity, a
problem that is central to economics. By including the
concept of scarcity it does not seek to break with the past
but to add to the past. It however includes the important
concept of knowledge, this paper has spent a lot of effort
showing the importance of knowledge. It is knowledge
that identifies resources, thus making them commodities. It
is crucial to understand this concept. In simplistic terms,
economics is the study of how we use resources that hu-
man minds have identified, and we use our minds to cre-
ate commodities and distribute them, distribution implies
choice. Who are commodities been distributed to? Hav-
ing knowledge understood as a key component of eco-
nomics, the beginning reader in economics will always
understand that materials are not resources unless the
human being has identified them as a resource and thus
commodify i ng t he material.
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