1.1.1 Economic Methodology

The Nature of Economics as a Social Science

Economics is a social science. It uses scientific methods to study human behaviour and societies, focusing on the production, distribution, and consumption of goods and services. It deals with complex human interactions, which are influenced by countless variables, making it distinct from natural sciences like physics or chemistry.

The Purpose of Economic Models

Due to this complexity, economists use models.

• A model is a simplified representation of economic reality used to understand, explain, and predict economic behaviour.
• Models require assumptions (generalisations about behaviour) to make complex situations manageable.

• Example:The Circular Flow of Income model simplifies the entire economy into a few key agents (households, firms, government) and their interactions.

The Social Scientific Method

Economists use the scientific method to study economic phenomena. This involves:

• Observation: Collecting data on economic behaviour and outcomes.
• Hypothesis Formation: Developing theories to explain observed patterns.
• Testing: Using statistical methods and experiments to test hypotheses against real-world data.
• Refinement: Adjusting models and theories based on empirical evidence and new information.

The Role of Ceteris Paribus

To isolate the relationship between two key variables, economists use the principle of ceteris paribus.

Ceteris paribus:A Latin phrase meaning ‘all other things being equal’ or ‘all other factors held constant’.

• Purpose: It allows economists to analyse a causal relationship between two variables without the distortion of other changing factors.
• Example: The law of demand states that ceteris paribus, as the price of a good falls, the quantity demanded will increase. This holds true only if we assume factors like consumer income, tastes, and the price of substitute goods remain unchanged.
• Limitation: In the real world, ‘other things’ are rarely constant, which is a key limitation of economic models.

Positive Economic Statements

Positive statements:Objective statements that describe'what is', 'what was', or 'what will be' in the economy.

Key Features:

• They are based on empirical evidence (facts and data).
• They can be tested or falsified (proven true or false).

Normative Economic Statements

Normative statements:Subjective statements that express an opinion or a value judgement about what ought to be.

Key Features:

• They are based on opinions, ethics, morals, and beliefs.
• They cannot be tested or proven false because they are a matter of debate.

The Role of Value Judgements

Value Judgement: a view about what is morally or subjectively important. These judgements underpin all normative statements.

They influence economic decision-making at all levels:

• Individuals: e.g., Choosing a job based on ethical values rather than just the salary.
• Governments: e.g., Prioritising spending on defence over welfare, or vice versa, based on political beliefs.

Value judgements determine the goals that economic policies aim to achieve. For instance, whether a government prioritises economic efficiency or equality a value judgement.