Scope and Nature of Economics

Methods of Economic Analysis:

An economic theory derives laws or generalizations through two methods:

(1) Deductive Method and (2) Inductive Method.

These two ways of deriving economic generalizations are now explained in brief:

(1) Deductive Method of Economic Analysis:

The deductive method is also named as analytical, abstract or prior method. The deductive method consists in deriving conclusions from general truths, takes few general principles and applies them draw conclusions.

For instance, if we accept the general proposition that man is entirely motivated by self-interest. In applying the deductive method of economic analysis, we proceed from general to particular.

The classical and neo-classical school of economists notably, Ricardo, Senior, Cairnes, J.S. Mill, Malthus, Marshall, Pigou, applied the deductive method in their economic investigations.

Steps of Deductive Method:

The main steps involved in deductive logic are as under:

(i) Perception of the problem to be inquired into: In the process of deriving economic generalizations, the analyst must have a clear and precise idea of the problem to be inquired into.

(ii) Defining of terms: The next step in this direction is to define clearly the technical terms used analysis. Further, assumptions made for a theory should also be precise.

(iii) Deducing hypothesis from the assumptions: The third step in deriving generalizations is deducing hypothesis from the assumptions taken.

(iv) Testing of hypothesis: Before establishing laws or generalizations, hypothesis should be verified through direct observations of events in the rear world and through statistical methods. (Their inverse relationship between price and quantity demanded of a good is a well established generalization).

Merits of Deductive Method:

The main merits of deductive method are as under:

(i) This method is near to reality. It is less time consuming and less expensive.

(ii) The use of mathematical techniques in deducing theories of economics brings exactness and clarity in economic analysis.

(iii) There being limited scope of experimentation, the method helps in deriving economic theories.

(iv) The method is simple because it is analytical.

Demerits of Deductive Method:

It is true that deductive method is simple and precise, underlying assumptions are valid.

(i) The deductive method is simple and precise only if the underlying assumptions are valid. More often the assumptions turn out to be based on half truths or have no relation to reality. The conclusions drawn from such assumptions will, therefore, be misleading.

(ii) Professor Learner describes the deductive method as ‘armchair’ analysis. According to him, the premises from which inferences are drawn may not
hold good at all times, and places. As such deductive reasoning is not applicable universally.

(iii) The deductive method is highly abstract. It require; a great deal of care to avoid bad logic or faulty economic reasoning.

As the deductive method employed by the classical and neo-classical economists led to many facile conclusions due to reliance on imperfect and incorrect assumptions, therefore, under the German Historical School of economists, a sharp reaction began against this method. They advocated a more realistic method for economic analysis known as inductive method.

(2) Inductive Method of Economic Analysis:

Inductive method which also called empirical method was adopted by the “Historical School of Economists". It involves the process of reasoning from particular facts to general principle.

This method derives economic generalizations on the basis of (i) Experimentations (ii) Observations and (iii) Statistical methods.

In this method, data is collected about a certain economic phenomenon. These are systematically arranged and the general conclusions are drawn from them.

For example, we observe 200 persons in the market. We find that nearly 195 persons buy from the cheapest shops, Out of the 5 which remains, 4 persons buy local products even at higher rate just to patronize their own products, while the fifth is a fool. From this observation, we can easily draw conclusions that people like to buy from a cheaper shop unless they are guided by patriotism or they are devoid of commonsense.

Steps of Inductive Method:

The main steps involved in the application of inductive method are:

(i) Observation.

(ii) Formation of hypothesis.

(iii) Generalization.

(iv) Verification.

Merits of Inductive Method:

(i) It is based on facts as such the method is realistic.

(ii) In order to test the economic principles, method makes statistical techniques. The inductive method is, therefore, more reliable.

(iii) Inductive method is dynamic. The changing economic phenomenon are analyzed and on the basis of collected data, conclusions and solutions are drawn from them.

(iv) Induction method also helps in future investigations.

Demerits of Inductive Method:

The main weaknesses of this method are as under:

(i) If conclusions drawn from insufficient data, the generalizations obtained may be faulty.

(ii) The collection of data itself is not an easy task. The sources and methods employed in the collection of data differ from investigator to investigator. The results, therefore, may differ even with the same problem.

(iii) The inductive method is time-consuming and expensive.

Scope of Economics:

The scope of economics is the area or boundary of the study of economics. In scope of economics we answer and analyze the following three main questions:

(i) What is the subject matter of economics?

(ii) What is the nature of economics?

(iii) What are the limitations of economic?

(i) Subject Matter of Economics:

There is a difference of opinion among economists regarding the subject-matter of economics. Adam Smith, the father of modern economic theory, defined economics as a subject, which is mainly concerned with the study of nature and causes of generation of wealth of nation.

Marshall introduced the concept of welfare in the study of economics. According to Marshall; economics is a study of mankind in the ordinary business of life. It examines that part of individual and social actions which is closely connected with the material requisites of well being. In this definition, Marshall has shifted the emphasis from wealth to man. He gives primary importance to man and secondary importance to wealth.

The Robbinsian’s concept of the subject-matter of economics is that: “economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses”. According to Robbins (a) human wants are unlimited (b) means at his disposal to satisfy these wants are not only limited, (c) but have alternative uses. Man is always busy in adjusting his limited resources for the satisfaction of unlimited ends. The problems that centre round such activities constitute the subject-matters of economics.

Paul and Samuelson, however, includes the dynamic aspects of economics in the subject matter. According to them, "economics is the study of how man and society choose with or without money, to employ productive uses to produce various commodities over time and distribute them for consumption now and in future among various people and groups of society”.

(ii) Nature of Economics:

The economists are also divided regarding the nature of economics. The following questions are generally covered in the nature of economics.

(a) Is economics a science or an art?

(b) Is it a positive science or a normative science?

(iii) Economics As a Science or An Art:

Economics is both a science and an art. Economics is considered as a science because it is a systematic knowledge derived from observation, study and experimentation. However, the degree of perfection of economics laws is less compared with the laws of pure sciences.

An art is the practical application of knowledge for achieving definite ends. A science teaches us to know a phenomenon and an art teaches us to do a thing. For example, there is inflation in Pakistan. This information is derived from positive science. The government takes certain fiscal and monetary measures to bring down the general level of prices in the country. The study of these fiscal and monetary measures to bring down inflation makes the subject of economics as an art.

After arriving at a conclusion that economics is both a science as well as an art. Here arises another controversy. Is economics a positive science or a normative science?

(iv) Economics is Positive or Normative Science:

There again difference of opinions among economists whether economics is a positive or normative science. Lionel Robbins, Senior and Friedman have described economics as a positive science. They opined that economics is based on logic. It is a value theory only. It is, therefore, neutral between ends.

Marshall, Pigou, Hawtrey, Keynes and many other economists regard economics as a normative science. According to them, the real function of the science is to increase the well-being of man. They have given suggestions in their works for promotion of human welfare.

For example, Malthus has given suggestions of checking the rising population. M. Keynes has suggested measures to remove unemployment.

We agree with Mr. Frazer, that an economist who is only an economist is a poor pretty fish. An economist must come forward to give advice to the problems facing the human being like depression, unemployment, high prices, etc., for increasing his welfare.

Economics, to conclude, has both theoretical as well as practical side. In other words, it is both a positive and a normative science.