Economics as a social science and its methodology

Economics is classified as a social science because it examines human behaviour, whether by individuals or within organisations, and how they allocate scarce resources. The approach economists take mirrors that used in natural and other sciences, relying on systematic methods to understand economic events.

Steps in the economic methodology

Economists follow a structured process to build and refine their understanding:

1. Develop theories and create economic models to explain observed phenomena.
2. Apply simplifying assumptions to focus on key variables.
3. Test theories and models against real-world evidence, using tools like observation, deduction, graphs, and statistics.
4. Use empirical data to improve and revise their economic models.
5. Use refined models to make predictions about future economic outcomes.

Unlike natural sciences, economists cannot perform controlled laboratory experiments where only one variable changes at a time. Empirical data, collected from actual observations or experiments, plays a key role in improving economic models and ensuring they reflect reality.

The use of ceteris paribus in economic analysis

Ceteris paribus is a Latin phrase meaning "all other things remaining equal". It is a crucial assumption in economics that allows analysts to examine the relationship between two specific variables while holding all other influences constant.

How ceteris paribus is applied

• Isolating variables - When studying factors like supply and demand, ceteris paribus assumes only these elements change, while others stay the same.
• Building theories - This assumption enables economists to develop models and theories.
• Making predictions - By focusing on key relationships, ceteris paribus helps forecast outcomes.

Positive and normative statements in economics

Economic statements fall into two categories: positive and normative. These distinguish between factual claims and those involving opinions, influencing how economists and policymakers communicate ideas.

Types of economic statements

• Positive statement - An objective statement that can be tested using available evidence. Based on facts; can be proven true or false through data or observation. Example: "An increase in taxation rates will decrease consumer spending."
• Normative statement - A subjective statement that includes a value judgement or opinion. Cannot be tested empirically; reflects beliefs or preferences. Example: "The use of non-renewable energy sources should be taxed more heavily than renewable sources."

The role of value judgements in economic decisions

Economic decisions by individuals, firms, or governments often incorporate opinions and judgements rather than purely objective data. These subjective elements shape choices and policies.

Factors influencing economic decisions

• Normative statements - Decisions may stem from subjective views.
• Moral views and value judgements - Choices might prioritise ethical considerations.
• Political judgements - Policies could reflect ideological beliefs.
• Short-term consequences - Focus might be on immediate positive outcomes, regardless of long-term effects.

Value judgements particularly affect government policy. For instance, a political party might introduce progressive taxation to redistribute wealth. These judgements blend with empirical data to guide real-world economic actions.