How Economists Approach the World

In this section, we will explore:

How Economists approach the world.

Postive Economics

The Role of Positive Economics

The first of these is based on positive statements, which are about something that is, was or will be. Positive statements are used in several ways: Positive statements play an important role in positive economics where they are used to describe economic events and to construct theories and models that try to explain these events. Positive statements are also used in stating laws. It should be stressed that the social scientific method, described above, is based on positive thinking. In their role as social scientists, economists use positive statements in order to describe, explain and predict.

The use of hypotheses, models & theories

In economics, as in other social (and natural) sciences, our efforts to gain knowledge about the world involve the formulation of hypotheses, theories, laws and models. Models area simplified representation of something in the real world, and are used a lot by scientists and social scientists in their efforts to understand or explain real-world situations. Models represent only the important aspects of the real world being investigated, ignoring unnecessary details, thereby allowing scientists and social scientists to focus on important relationships.

In more advanced economics, models are illustrated by use of mathematical equations. (Note that both diagrams and mathematical equations are used to represent models in natural sciences, such as physics, as well.) To construct a model, economists select particular variables and make assumptions about how these are interrelated. Different models represent different aspects of the economic world. Some models may be better than others in their ability to explain economic phenomena.

Models are often closely related to theories, as well as to laws.

A theory tries to explain why certain events happen and to make predictions;

A law is a concise statement of an event that is supposed to have universal validity.

Models are often built on the basis of well-established theories or laws, in which case they may illustrate, through diagrams or mathematical equations, the important features of the theory or law. When this happens, economists use the terms ‘model’ and ‘theory’ interchangeably, because in effect they refer to one and the same thing.

The use of Empirical Evidence

In economics, empirical evidence refers to the information and data gathered through observation, measurement, and experimentation. It involves using real-world data to test economic theories, hypotheses, and models. Empirical evidence serves as the foundation for economic analysis and helps economists understand the relationships between various economic variables.

Empirical evidence can take different forms in economics, including:

Quantitative data: This involves numerical information collected from sources such as surveys, censuses, government reports, financial statements, and economic indicators. Quantitative data is often used to analyze trends, measure economic variables, and establish statistical relationships.

Qualitative data: This involves non-numerical information gathered through methods such as interviews, case studies, focus groups, and observations. Qualitative data can provide insights into individual behaviors, motivations, preferences, and perceptions, helping economists understand the human elements of economic decisions.

Experiments: Economists may conduct controlled experiments to gather empirical evidence. Experimental economics often involves setting up controlled environments to test economic theories or policies and measure the responses of individuals or groups. This approach allows economists to observe cause-and-effect relationships and draw conclusions about economic behavior.

By analyzing empirical evidence, economists can assess the validity of economic theories, evaluate policy effectiveness, predict economic outcomes, and provide evidence-based recommendations. However, it's essential to use rigorous methods, ensure data quality, account for potential biases, and consider the limitations of the available data when interpreting empirical evidence in economics.

The assumption of Ceteris Paribus

The assumption of ceteris paribus, which means "all other things being equal" in Latin, is a fundamental principle in economics. It is used to isolate the effect of a specific variable or factor on an economic relationship or outcome while holding other factors constant. By assuming ceteris paribus, economists can simplify complex economic systems and focus on analyzing the impact of a single variable without the interference of other potentially confounding factors. This assumption allows economists to establish cause-and-effect relationships, make predictions, and develop theoretical models. However, it is important to recognize that in the real world, all factors are rarely held constant, and changes in one variable can have ripple effects on other variables. Nonetheless, ceteris paribus serves as a useful analytical tool for understanding economic phenomena and exploring the effects of specific variables in controlled settings.

The use of Logic

Logic plays a crucial role in economics as it provides the framework for reasoning and analysis. By employing logical reasoning, economists can derive conclusions from assumptions and build coherent economic theories and models. Logic allows economists to identify inconsistencies, evaluate the internal consistency of economic arguments, and assess the validity of economic claims. It helps in deducing logical implications, formulating testable hypotheses, and drawing logical inferences based on empirical evidence. Moreover, logical thinking enables economists to identify fallacies, analyze complex relationships, and make logical connections between different economic variables, contributing to a systematic and rigorous approach to economic analysis.

The Role of Refutation

Refutation plays a vital role in economics by challenging and testing the validity of economic theories and hypotheses. It involves critically examining and attempting to disprove existing economic ideas through empirical evidence and logical reasoning. Refutation helps economists identify flaws, inconsistencies, or limitations in economic models and theories, promoting intellectual rigor and progress in the field. By subjecting theories to rigorous scrutiny and attempting to refute them, economists can refine existing knowledge, develop more robust theories, and advance our understanding of economic phenomena. Refutation serves as a crucial mechanism for quality control, ensuring that economic analysis is based on sound evidence and logical foundations.

Normative Economics

Normative Economic Statements

The second way of thinking about the economic world, dealing with how things ought to work, is based on normative statements, which are about what ought to be. Normative statements are important in normative economics, where they form the basis of economic policy-making. Economic policies are government actions that try to solve economic problems. When a government makes a policy to lower the unemployment rate, this is based on a belief that the unemployment rate is too high, and the value judgement that high unemployment is not a good thing. If a government pursues a policy to make health care available free of charge, this is based on a belief that people should not have to pay for receiving health care services.

Value Judgements in Policy Making

Value judgments play a significant role in policy making as they involve subjective assessments of what is desirable or morally right. When formulating policies, policymakers often need to consider and weigh various values, such as social welfare, equity, efficiency, freedom, and sustainability. These values influence the goals and objectives of policy interventions, shaping the direction and priorities of policy decisions. Value judgments also come into play when policymakers evaluate the trade-offs and potential impacts of different policy options. They help determine which outcomes or distributional effects are considered preferable or undesirable based on the values held by policymakers and society at large. However, it is crucial to recognize that value judgments can vary among individuals and groups, and policy decisions may involve reconciling conflicting values. Transparency and public participation are essential in navigating value judgments to ensure that policies align with societal values and preferences.

The meaning of equity and equality

In economics, equity and equality are two distinct concepts related to the distribution of resources and opportunities. Equality refers to the idea of treating everyone in the same manner, providing equal access to resources and opportunities without regard to individual circumstances. On the other hand, equity focuses on fairness and considers the unique needs and circumstances of individuals, aiming to achieve a more just distribution. Equity recognizes that individuals may start from different positions and require different levels of support to attain an equal outcome. It involves addressing inequalities and redistributing resources in a way that promotes fairness and equal opportunity. While equality emphasizes uniformity, equity emphasizes fairness and addressing disparities to ensure that everyone has a reasonable chance to succeed. Achieving both equality and equity is often seen as an important goal in creating a just and inclusive society.

Page updated

Google Sites

Report abuse