Economics (9640) | Economic methodology

Introduction: Why Methodology Matters (It's Not Just Theory!)

Welcome! This chapter, Economic Methodology, might seem abstract, but it is one of the most important concepts you will cover. It teaches you how economists think, gather evidence, and ultimately, why they often disagree on policy solutions.
Think of it as learning the rulebook for being an economist. Mastering this helps you critique arguments and understand the limits of economic forecasting. Let's dive in!

3.1.1.5 Economic Methodology: The Science of Human Behaviour

What is Economics, and Why is it a Social Science?

Economics is classified as a Social Science. This means it is an academic discipline concerned with society and the relationships among individuals within that society.

• Focus: Economists study how individuals, firms, and governments make choices about allocating scarce resources (a concept we covered in the previous section) to satisfy unlimited wants.
• Key Challenge: Because the subjects of economics are human beings, their behaviour is often complex, subjective, and prone to change.

Analogy: Physics studies how objects react to gravity (a constant law). Economics studies how people react to a price change (which depends on their mood, wealth, and beliefs!).

Comparing Economic Methodology to Natural Sciences

Economists try to adopt the methods of Natural Sciences (like Physics or Chemistry) but face significant difficulties because they are studying people, not chemicals.

Similarities in Methodology

Economists follow the core steps of the scientific method:

1. Observation: Looking at real-world data (e.g., observing that when the price of chocolate goes up, people buy less).
2. Hypothesis: Forming a testable statement (e.g., "A 10% tax increase will lead to a 5% drop in consumption.").
3. Testing: Using statistical data and historical information to check if the hypothesis holds true.
4. Theory/Model Building: If the hypothesis is consistently supported, it might become part of an established theory (like the Law of Demand).

Differences in Methodology (Why Economics is Tricky)

This is where the distinction from 'hard science' becomes clear:

• Lack of Controlled Experiments: Economists cannot put a country in a sealed laboratory and only change one variable (e.g., just the interest rate) while holding everything else constant.
  This reliance on the assumption of ceteris paribus (all other things being equal) is a major limitation.
• Predictive Difficulty: Human behaviour is not perfectly rational or predictable. People learn and change their actions, making precise long-term forecasts nearly impossible.
• Data Quality: Economic data, especially historical data, may contain errors, making rigorous testing difficult.
• Value Judgements: As we will see below, the subjective views of the economist inevitably influence the research questions asked and the policies recommended.

Positive vs. Normative Statements: Fact vs. Opinion

The Crucial Distinction

To think like an economist, you must separate statements of fact (which can be tested) from statements of opinion (which cannot).

1. Positive Statements

Positive statements are objective statements that can be tested, proven, or disproven by reference to facts or empirical evidence. They describe "what is" or "what will happen."

• Testable: You can check them against data.
• Example 1: "Increasing the minimum wage will lead to higher unemployment." (We can observe unemployment figures after a minimum wage change to test this.)
• Example 2: "A fall in the exchange rate will make exports cheaper."

2. Normative Statements (Value Judgements)

Normative statements are subjective claims that carry a value judgement. They express opinions about "what ought to be" or "what is best." They cannot be proven right or wrong using facts alone.

• Not Testable: They reflect moral or ethical priorities.
• Example 1: "The government should increase the minimum wage to improve fairness." (Fairness is a subjective opinion.)
• Example 2: "Taxes on soft drinks are too high." (What constitutes "too high" is a matter of opinion.)

Did You Know?

Economists often agree strongly on positive statements (e.g., "imposing a tariff raises the price of imports"), but they fiercely disagree on the normative conclusions (e.g., "therefore, we should impose a tariff to protect local jobs").

The Role of Value Judgements in Policy and Decision Making

The syllabus emphasises that economic policy and decisions are never purely based on cold, hard facts (positive statements). They are heavily influenced by underlying beliefs and subjective views, known as value judgements.

1. How Value Judgements Influence Policy

When a government decides on a policy, it is weighing trade-offs—and that process requires value judgements.

• Goal Setting: Normative beliefs determine which objectives are prioritised. For instance, one political party might believe "price stability is the most important goal" (normative), while another believes "reducing inequality ought to be the priority" (normative).
• Interpreting Data: Two economists might look at the same data set showing increased income inequality.
  • Economist A (focusing on efficiency) might argue: "The inequality is acceptable because it rewards risk-takers and drives growth." (Value Judgement focused on efficiency).
  • Economist B (focusing on equity) might argue: "The inequality is unacceptable and requires higher taxes on the rich." (Value Judgement focused on fairness/equity).

2. Why People's Views Differ on the Best Option

A person's view on the best economic decision is determined by a combination of two things:

A. The Positive Consequences of Decisions (The Facts)

This involves evaluating the expected outcomes objectively:

• Prediction of Outcomes: Policy A might lead to 50,000 new jobs, but also 2% higher inflation. Policy B might lead to no inflation but only 10,000 new jobs.
  People’s views differ based on which outcome they believe will occur or which forecast they trust.
• Trade-offs: Most policies involve sacrificing one thing to gain another. The decision relies on how a person weighs those outcomes (e.g., is low unemployment worth higher inflation?).

B. Moral and Political Judgements (The Values)

These are the non-economic, ethical beliefs that dictate personal preferences:

• Morality and Ethics: Should we prioritise the welfare of the poorest over the wealth of the richest? This is a moral question, not a calculation.
• Political Ideology: Different ideologies lead to different conclusions. A free-market politician might argue that any government intervention is inherently bad (a political value judgment), regardless of the short-term positive outcomes promised by economists.
• Equity vs. Efficiency: Decisions constantly involve balancing equity (fairness in distribution) and efficiency (getting the most output from resources). The choice between them is the ultimate value judgement.

Key Takeaway: Economics provides the tools (positive analysis) to understand the consequences of a choice, but value judgements (normative analysis, moral beliefs, political views) are always needed to decide which consequences are desirable.