Economic Methodology and Drawbacks of Objective Thinking of economics

Economic Methodology

• Economists use the scientific method to establish theories, laws, and principles.
  • The scientific method consists of:
    • The observation of facts (real data).
    • The formulations of explanations of cause and effect relationships (hypotheses) based upon the facts.
    • The testing of the hypotheses.
    • The acceptance, reject, or modification of the hypotheses.
    • The determination of a theory, law, principle, or model.
  • Theoretical economics: The systematic arranging of facts, interpretation of the facts, making generalizations.
  • Principles are used to explain and/or predict the behavior of individuals and institutions.
  • Terminology-Principles, laws, theories, and models are all terms that refer to generalizations about economic behavior. They are used synonymously in the text, with custom or convenience governing the choice in each particular case.
  • Generalization-Economic principles are expressed as the tendencies of the typical or average consumer, worker, or business firm.
  • "Other things equal" or ceteris paribus assumption-In order to judge the effect one variable has upon another it is necessary to hold other contributing factors constant. Natural scientists can test with much greater precision than can economists. They have the advantage of controlled laboratory experiment. Economists must test their theories using the real world as their laboratory.
  • Abstractions-Economic principles, theories or models are abstractions, simplifications, which attempt to find the important connections and relationships of economic behavior. These models are useful precisely because they strip away the clutter and complexity of reality.
  • Graphical Expression-Many economic relationships are quantitative, and are demonstrated efficiently with graphs. The "key graphs" are the most important.
• Policy economics applies economic facts and principles to help resolve specific problems and to achieve certain economic goals.
• Steps in formulating economic policy:
  • State goals.
  • Recognize various options that can be used to achieve goals.
  • Evaluate the options on the basis of specific criteria important to decision-makers.
  • Economic goals widely accepted in our economy.
  • Economic growth
  • Full employment
  • Economic efficiency
  • Price level stability
  • Economic freedom
  • Equitable distribution of income
  • Economic security
  • Balance of trade
• Goals may be complementary 
• Some goals may conflict 
• All goals cannot be achieved, so priorities must be set.

Drawbacks of  Objective Thinking of economics 

• Biases-Preconceptions that are not based on facts.
• Loaded terminology.
  • Terms that contain the prejudice and value judgments of others.
  • It is very difficult for a person to describe economic behavior without letting their options about that behavior creep into their discussion.The distinction between positive and normative statements is not always clearly apparent.
  • Often, however, there is a deliberate attempt to sway opinion by using loaded terminology.(greedy owners, obscene profits, exploited workers, mindless bureaucrats, costly regulations, creeping socialism)
• Definitions
  • Economics is a second language.
  • It is often difficult for students to recognize terms as new vocabulary that needs to be studied as diligently as though they had never before encountered the words.
  • Students in a physics class encountering terms like erg, ohm, or foot-pound recognize the need to investigate.Students that are reading a text filled with words like rent, capital, or investment assume that they already have an adequate working definition.
• Causation Fallacies
  • Post hoc fallacy:When two events occur in time sequence, the first event is not necessarily the cause of the second event.
  • Correlation versus causation:Events may be related without a causal relationship.
  • The positive relationship between education and income does not tell us which causes the increase in the other. (Which is the independent variable and which is the dependent variable?)
  • It may be that the increase income that occurs with increased education is due to some other third factor that is not under direct consideration.