Tag: Methods

  • What is the Deductive Method of Economics?

    What is the Deductive Method of Economics?

    The Deductive Method: Deduction Means reasoning or inference from the general to the particular or from the universal to the individual. The deductive method derives new conclusions from fundamental assumptions or truth established by other methods. This article explains the Deductive Method of Economics; It involves the process of reasoning from certain laws or principles, which are assuming to be true, to the analysis of facts. Also learn, What are the Methods of Economics?

    Here are explaining and learn, What is the Deductive Method of Economics? Steps, Merits, and Demerits.

    Then inferences are drawn which are verifying against observing facts. Bacon described deduction as a “descending process” in which we proceed from a general principle to its consequences. Mill characterized it as a priori method, while others called it abstract and analytical.

    Deduction involves four steps:

    1. Selecting the problem.
    2. The formulation of assumptions based on which the problem is to explore.
    3. The formulation of hypothesis through the process of logical reasoning whereby inferences are drawn.
    4. Verifying the hypothesis.

    These steps are discussing as under, Following are:

    Selecting the problem:

    The problem which an investigator selects for inquiry must state clearly. It may be very wide like poverty, unemployment, inflation, etc. or narrow relating to the industry. The narrower the problem the better it would be to conduct the inquiry.

    Formulating Assumptions:

    The next step in deduction is the framing of assumptions which are the basis of the hypothesis. To be fruitful for inquiry, the assumption must be general. In any economic inquiry, more than one set of assumptions should make in terms of which a hypothesis may formulate.

    Formulating Hypothesis:

    The next step is to formulate a hypothesis based on logical reasoning whereby conclusions are drawn from the propositions. This is done in two ways: First, through logical deduction. If and because relationships (p) and (q) all exist, then this necessarily implies that relationship (r) exists as well. Mathematics is mostly using these methods of logical deduction.

    Testing and Verifying the Hypothesis:

    The final step in the deductive method is to test and verify the hypothesis. For this purpose, economists now use statistical and econometric methods. Verification consists of confirming whether the hypothesis is in agreement with facts. A hypothesis is true or not can verify by observation and experiment. Since economics is the concern with human behavior, there are problems in making an observation and testing a hypothesis.

    For example, the hypothesis that firms always attempt to maximize profits rests upon the observation that some firms do behave in this way. This premise base on a priori knowledge that will continue to accept so long as conclusions deduced from it is consistent with the facts. So the hypothesis stands verified. If the hypothesis not confirms, it can argue that the hypothesis was correct but the results are contradictory due to special circumstances. Explain are Economics is a Science and Art?

    Under these conditions, the hypothesis may turn out to the wrong. In economics, most hypotheses remain unverified because of the complexity of factors involving in human behavior which, in turn, depend upon social, political and economic factors. Moreover, controlled experiments in a laboratory are not possible in economics. So the majority of hypotheses remain untested and unverified in economics. Also learn, What are the Fundamentals of Economics?

    Merits of the Deductive Method:

    The deductive method has many advantages.

    Real:

    It is the method of “intellectual experiment,” according to Boulding. Since the actual world is very complicated, “what we do is to postulate in our minds economic systems which are simpler than reality but more easy to grasp. We then work out the relationship in these simplified systems and by introducing more and more complete assumptions, finally, work up to the consideration of reality itself.” Thus, this method is nearer to reality.

    Simple:

    The deductive method is simple because it is analytical. It involves abstraction and simplifies a complex problem by dividing it into parts. Further, the hypothetical conditions are so chosen as to make the problem very simple, and then inferences are deducing from them.

    Powerful:

    It is a powerful method of analysis for deducing conclusions from certain facts. As pointed out by Cairnes, The method of deduction is incomparable, when conducted under proper checks, the most powerful instrument of discovery ever wielded by human intelligence.

    Exact:

    The use of statistics, mathematics, and econometrics in deduction brings exactness and clarity in economic analysis. The mathematically trained economist can deduce inferences in a short time and make analogies with other generalizations and theories. Further, the use of the mathematical-deductive method helps in revealing inconsistencies in economic analysis.

    Indispensable:

    The use of the deductive method is indispensable in sciences like economics where experimentation is not possible. As pointed out by Gide and Rist, “In a science like political economy, where an experiment is practically impossible, abstraction and analysis afford the only means of escape from those other influences which complicate the problem so much.”

    Universal:

    The deductive method helps in drawing inferences that are of universal validity because they are based on general principles, such as the law of diminishing returns.

    Demerits of Deductive Method:

    Despite these merits, much criticism has been leveled against this method by the Historical School which flourished in Germany. Explain are What is Economics? Meaning and Definition of Criticisms.

    Unrealistic Assumption:

    Every hypothesis is based on a set of assumptions. When a hypothesis is testing, assumptions are indirectly testing by comparing their implications with facts. But when facts refute the theory based on the tested hypothesis, the assumptions are also indirectly refuted. So deduction depends upon the nature of assumptions. If they are unrealistic, in this method, economists use the ceteris paribus assumption. But other things seldom remain the same which tend to refute theories.

    Not Universally Applicable:

    Often the conclusions derived from deductive reasoning are not applied universally because the premises from which they are deducing may not hold good at all times and places. For instance, the classicists assumed in their reasoning that particular conditions prevailing in England of their times were valid universally. This supposition was wrong. Prof. Lerner, therefore, points out that the deductive method is simply “armchair analysis” which cannot regard as universal.

    Incorrect Verification:

    The verification of theories, generalizations or laws in economics is based on observation. And right observation depends upon data which must be correct and adequate. If a hypothesis is deducing from wrong or inadequate data, the theory will not correspond with facts and will refute. For instance, the generalizations of the classicists were based on inadequate data and their theories were refuted. As pointed out by Ircholson, “the great danger of the deductive method lies in the natural aversion to the labor of verification”.

    Abstract Method:

    The deductive method is highly abstract and requires great skill in drawing inferences for various premises. Due to the complexity of certain economic problems, it becomes difficult to apply this method even at the hands of an expert researcher. More so, when he uses mathematics or econometrics.

    Static Method:

    This method of analysis is based on the assumption that economic conditions remain constant. But economic conditions are continuously changing. Thus this is a static method that fails to make the correct analysis.

    Intellectually:

    The chief defect of the deductive method “lies in the fact that those who follow this method may absorb in the framing of intellectual toys and the real world may forget in the intellectual gymnastics and mathematical treatment”.

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  • What are the Methods of Economics?

    What are the Methods of Economics?

    Methods of Economics: First, Definition of Economics as; The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human materials wants. This article explains the Methods of Economics; Economic methodology is the study of methods, especially the scientific method, about economics, including principles underlying economic reasoning. The deductive and inductive method involves reasoning from a few fundamental propositions, the truth of which is assumed. Human wants are unlimited, but the means to satisfy the wants are limited. Also learn, What are the Fundamentals of Economics?

    Here are explaining and learn, What are the Methods of Economics?

    The following Methods of Economics below are;

    The Economic Perspective:

    • Scarcity and choice: Resources can only use for one purpose at a time. Scarcity requires that choices make. The cost of any good, service, or activity is the value of what must give up to obtain it. As well as, How to explain the Nature of Business Economics?
    • Rational Behavior: Rational self-interest entails making decisions to achieve maximum fulfillment of goals. Different preferences and circumstances lead to different choices. Rational self-interest is not the same as selfishness.
    • Marginalism – benefits, and costs: Most decisions concern a change in current conditions; therefore the economic perspective is largely focusing on marginal analysis. Each option considered weighs the marginal benefit against the marginal cost. Whether the decision is personal or one made by business or government, the principle is the same. The marginal cost of action should not exceed its marginal benefits. There is “no free lunch” and there can be “too much of a good thing.”

    Why Study Economics?

    The below are;

    • Economics of citizenship: Most political problems have an economic aspect, whether it is balancing the budget, fighting over the tax structure, welfare reform, international trade, or concern for the environment. Both the voters and the elected officials can fulfill their role more effectively if they have an understanding of economic principles.
    • Professional and personal applications: The study of economics helps to develop an individual’s analytical skills and allows students to better predict the logical consequences of their actions. Economic principles enable business managers to make more intelligent decisions. Economics can help individuals make better buying decisions, better employment choices, and better financial investments. Economics is, however, mainly an academic, not a vocational subject. Its primary objective is to examine problems and decisions from a social rather than a personal point of view. It is not a series of “how to make money” examples.

    Methods of Economics:

    Some of the most important methods of economic analysis are as follows:

    1. Deductive Method, and.
    2. Inductive Method.

    Economic generalizations describe the laws or statements of tendencies in various branches of economics such as production, consumption, exchange, and distribution of in­come. In the view of Robbins, economic generalizations or laws are statements of uniformities that describe human behavior in the allocation of scarce resources between alternative ends.

    The generalizations of economics like the laws of other sciences, state cause and effect relationships between variables and describe those economic hypotheses which have been found consistent with facts or, in other words, are true by empirical evidence. But a distinction may draw between a generalization (law) and a theory.

    A law or generalization just describes the relationship between variables; it does not provide any explanation of the described relation. On the other hand, a theory explains the stated relation between the variables, that is, it brings out the logical basis of the generalization. Economic theory or a model derives a generalization through the process of logical reasoning and explains the conditions under which the stated generalization will hold.

    Deductive Method of Economics:

    The deductive method is known as the analytical abstract a priori method. Here we start with certain formal data and assumptions. Then by logical reasoning, we arrive at certain conclusions. We start with undisputed fundamental facts and after adding some assumptions we build up a theory. For instance, it is assumed that businessmen aim at maximum profit. It follows from this that businessmen buy the materials in the cheapest market and sell them in the dearest market.

    In the Deductive method of Economic Analysis, we proceed from the general to the particular. This is also known as a hypothetical method for some of the assumptions that may not correspond to facts, but very near facts which may use as the premise for starting, reasoning and drawing conclusions. In economics, we start with very simple premises and work up gradually or more and more complex hypotheses.

    Inductive Method of Economics:

    In this method, economists proceed from a practical angle to problems of science to reduce the gulf between theory and practice. Induction is done by two forms, viz. experimentation and statistical form. Facts are collecting first, arrange and conclusions are drawn. Then these general conclusions are further verified concerning facts.

    The inductive method is generally associating with the statistical form of inductions. The statistical approach has a larger field in economic investigations than the method of experimentation. Further, the method of statistical induction is indispensable for the formulation of economic policy. Malthus presented his famous theory of population only after studying the facts of the population in various countries; He then used statistics to support his theory. Similarly, Engel, the German statistician employed the inductive method and used statistics to formulate his law of consumption.

    The Inductive method can apply in two distinct ways:

    1. The experimental method, and.
    2. Statistical method.

    Deductive or Inductive?

    From the above discussion, we can infer that there is no point in pleading one method against the other. The two methods have to make use of or blended to achieve the required objective. The two methods, deductive and inductive, are not competitive, but complementary helping the investigator. Explain are Economics is a Science and Art?

    Just, like any other matter, the issue, whether the deductive method is to refer to the inductive method or vice versa, became a raging controversy in the last century. The classical school of Britain represented by David Ricardo, Malthus, J.S.Mill, N.Senior, etc., strongly advocated deduction and affirmed their support in deductive methodology. On the contrary, the Historical School in Germany represented by Carl Knies, Roscher, Hildebrand, etc., affirmed faith in an inductive method. The controversy over methodology went on until Alfred Marshall brought about a compromise.

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