Economic Reasoning

Economics is one of the social sciences. So in what sense is it a science? Is it like the natural sciences such as physics and astronomy? What is the significant of the word ‘social’ in social science? What can economists do, and what is their role in helping governments device economic policy? The methodology employed by economists has a lot in common with that employed by natural scientists. Both attempt to construct theories or models which are then used to explain and predict. An astronomer, for example, constructs models of planetary movements to explain why planets are in the position they are and to predict their position in the future. In order to explain and predict, the economist constructs models of the economy or parts of the economy. These models show simplified relationships between various economic phenomena. For example, a model of a market shows the relationship between demand, supply and price. Although most models can be described verbally, they can normally be represented more precisely in a graphical or mathematical form. Models are constructed by making general hypothesis about the cause of economic phenomena: for example, that construct demand will rise when consumer incomes rise. These hypotheses will often be based on observations. This process of making general statements from particular observations is known as induction. Models explain by showing how things are caused: what are the causes of inflation, why do workers in some industries ear more than others, and so on. Models are sometimes used to make simple forecasts: for example, inflation will be below 5 per cent next year. Usually, however, predictions are of the ‘ if….then…’ variety: for example, if demand for good x rises, its price will rise. This process of drawing conclusions form models is known as deduction. When making such declarations it has to be assumed that nothing else that can influence the outcome has changed in the meantime. For example, if demand for good x rises, its price will rise assuming the cost of producing good x has not fallen. This is known as the ceteris paribus assumption. Ceteris paribus is Latin for ‘ other things being equal’.