Meaning of Methodology in Economics
Every science follows certain methods for the formulation of its laws, principles, and theories. Since economics is a science, it also adopts certain methods for the discovery and formulation of its laws and principles thus there are certain methodological issues in economics. There are some writers, who recognize the claim of economics to be considered a science on the specific ground that it makes use of scientific methods in its theoretical tools and weapons.
Broadly saying there are two methods of investigation available to the economists as Deductive Method descends from the general to the particular that is we start from certain principles which are either self-evident or based on strict observation, and carry them down a process of pure reasoning to the consequences which they implicitly contain and
Inductive Method mounts from the particular to the general that is we begin with the observation of particular facts and then mount up with the help of reasoning founded on experience to formulate laws and theorems based on the observed facts. Before dealing with these two methods of investigation some basic concepts relating to economic laws, theories, and methodological issues in economics are presented below;
Nature of Scientific Theory/Scientific Status of Economic Theories
A scientific theory sets up the relationship between facts. In other words, it explains the cause and effect relationship between different variables. The scientific status of economic theory is related to methodological issues in economics. The methodology of economics decides the scientific nature of economic theories.
In economics economists do play with several economic variables like prices, quantities demanded and supplied, the money supply, national income, employment, wages, profits, and so on.
Every theory is based on a set of assumptions often called premises and postulates. Assumptions are considered in theories to make them more simplified and understanding though they may not be entirely realistic.
In economics, economic theories also undertake different assumptions-relating to the behavior of economic variables-behavioral assumptions. With the help of considered assumptions, some implications or conclusions are deduced through a logical process of reasoning. The conclusions drawn from the assumptions through deductive logic are called a hypothesis.
The scientific hypothesis states that propositions about the relationship between facts or variables in a form that is testable or falsifiable that propositions that are capable of being refuted.
If the predictions based on a hypothesis are refuted by the direct observation of facts or through the statistical methods of interpreting facts, a hypothesis stands rejected. If testing the predictions based on a given hypothesis are proved correct it stands established as a scientific theory.
For example, the quantity demanded varies inversely with the price is one of the important hypotheses established in economics. If the government imposes sales tax on a commodity and as a result, the price of the commodity increases the production will decline, other things remain the same. This has not been falsified and in fact, has been corroborated by the facts of the real world. So the law of demand states that there is an inverse relationship between price and quantity demanded is a scientific economy hypothesis/theory.
The Keynesian hypothesis that under the condition of less than full employment of resources, level of NI, and employment are determined by the magnitude of aggregate effective demand is also a well-established economic hypothesis regarding the developed capitalistic economies.
This Keynesian hypothesis implies that the increase in aggregate demand through deficit budgeting by the government under the condition of less than full employment will lead to a rise in national income and employment. This has also been generally found consistent with facts and the Keynesian theory of effective demand has been proved to be valid for the advanced capitalist economies by empirical evidence.
Therefore, if the predictions based on hypotheses are falsified by the facts of real-life then they will turn into a scientific hypothesis or theory. Every hypothesis or theory is based upon some simplifying assumptions which are not quite realistic thus economic theories are an abstraction from reality.
Good hypotheses or theories are abstract from reality in a useful and scientific way. If we do not abstract from reality we would only copy the real world in a camera-like way and will not add any understanding of it.
The crucial test of a hypothesis pr theory is whether predictions that follow from it are falsified or not by the empirical evidence that is by the facts in the real world.
If the predictions of the hypothesis or theory are found to be consistent with the fact, its assumptions would be justified even if they are unrealistic. Thus, a hypothesis or theory should not be criticized simply because the assumptions used are unrealistic. The hypothesis is suitable if its predictions are found to be reliable with the facts.
Generalization/Derivation of Economic Theories
Derivation of economic theories or economic generalization refers to the laws or statements of tendencies in various branches of economics like production, consumption, exchange, and distribution of income. In the view of Robbins, economic generalizations and laws are statements of uniformities that describe human behavior in the allocation of scarce resources between alternative ends. It means all the economic laws (generalization) i.e. derived or generalized theories are realistic representations of human behavior and thus they always guide human beings in the efficient allocation of scarce economic resources. The generalization is also concerned with methodological issues in economics.
Generalization of economics and economic theories like the laws of other sciences states the relationship between variables and describes those economic hypotheses which have been found consistent with facts or in other words are true by empirical evidence.
The generalization or law means the description of the relationship between different economic variables like the law of demand states that there exists an inverse relationship between the price of the commodity and demand for that commodity. Here the law of demand does not explain why this happened and how this happens. This is explained by theory. Economic theory is thus a detailed explanation of the stated relationship between variables. Economic theory ensures the logical basis of generalization.
The Generalization Or Laws
For a layman law and theory are similar concepts. Law is a description of an observed relationship or phenomenon and law does not explain why the relation or phenomenon exists or what causes it. This explanation is given by the theory. Deducing laws is directly linked with the methodological issues in economics.
There might be a misconception that theories turn into law only after enough research. Laws stand at the starting place and from there; researchers can go for issues like why and how. In scientific methodology, laws stand at a starting place.
In economics, laws are statements of general tendencies or uniformities in the relationship between two or more economic phenomena. Marshall defined economic laws as. “Economic laws or statements of economic tendencies are those special laws, which relate to those branches of conduct in which the strength of the motive chiefly concerned can be measured by money prices.” This definition considered economic laws as; statements of economic tendencies, social laws, concerned with human behavior, and human behavior can be measured in money.
Similarly, Robbins defined economic laws as, “Economic laws are statements of uniformities about human behavior concerning the disposal of scarce means with alternative uses for the achievement of ends that are unlimited.”
Economic laws are thus a statement of tendencies or uniformities relating to human behavior.
Nature of Economic Laws
Like scientific laws, economic laws trace out casual relationships. As in natural science, a definite result is expected to follow from a particular cause in economics. For example, the law of demand states that other things remaining the same s fall in price leads to an extension in demand and vice versa. The methodology of economics or methodological issues in economics defines the nature of economic laws.
According to Robbins, economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this logic, they are on the same stage as other scientific laws.
Regardless of these similarities, economic laws are not as precise and positive as the laws of natural sciences. Economic laws do not operate with as much certainty as scientific laws (It is because of the nature of the methodology of economics).
According to Marshall, there is no economic tendency that acts as steadily and can be measured as exactly as gravitation can, and consequently, there are no laws of economics that can be compared for precision with the law of gravitation.
There is controlled experimentation in natural sciences but in economics controlled experimentation is not possible. But a comparison to the law of other social sciences laws of economics is less hypothetical but more exact, precise, and accurate. This is because economics uses money as a measuring rod that is not available to other social sciences like ethics, sociology, etc. making economics more pragmatic and exact. Economic laws are however less certain than laws of other social sciences because of the use of money as a measuring rod. It is because the value of money keeps on changing so it creates uncertainty.
To sum up, economic laws are more behaviorist, indicative (for example law of demand indicates that with a fall in price demand will increase but does not assert that demand must fall when price increases), essentially hypothetical, truism, axioms (not having any empirical content like human wants are unlimited, saving is the function of income, etc. are universally accepted and no need to verify), and relative.
Economic theory may be defined as a box of tools with which economists construct economic models to study the economic phenomenon which frequently occurs in the real world. Like other sciences, economic theory also provides us with the general propositions which are employed in the analysis of economic phenomena within certain limits. These limitations in economic models/ economic theories come from assumptions. To this extent, all the economic theories are based on certain assumptions, and these theories are abstract from reality.
The theory is a well-sustained explanation acquired through the scientific method and repeatedly tested and confirmed through observation and experimentation. Repeated testing and experimentation of hypotheses relating to a certain relation or phenomenon gives a theory. So theory gives the most comprehensive and accurate answer to the issues like why and how.
Ahuja, H.L. (2017). Advanced Economic Theory. New Delhi: S Chand And Company Limited.
Jhingan, M.L (2012). Advanced Economic Theory. New Delhi: Vrinda Publications (P) LTD.