Methods of Economic Analysis
Like any other science, Economics adopts two important methods in its investigations and formulation of laws and principles. The two methods are
- Deductive Methods and
- Inductive Methods.
Let us discuss the importance of these two methods.
Deductive Method of Economic Analysis
Deductive method is known as the analytical abstract a priori method. Here we start with certain formal data and assumptions. Then by logical reasoning we arrive at certain conclusions. We start with undisputed fundamental facts and after adding some assumptions we build up a theory. For instance, it is assumed that businessmen aim at maximum profit. It follows from this that businessmen buy the materials in the cheapest market and sell it in the dearest market.
In Deductive method of Economic Analysis we proceed from the general to the particular. This is also known as an hypothetical method for some of the assumptions may not correspond to actual facts, but very near actual facts which may be used as premise for starting, reasoning and drawing conclusions. In economics we start with very simple premises and work up gradually or more and more complex hypotheses.
A complete form of deductive method consists of three stages, viz.,
- deductive reasoning and
- instance and testing by means of further observations.
Deductive reasoning provides us with hypotheses or generalizations. If the hypotheses are tested and verified with relevance to facts, we have valid economic laws.
Advantages of Deductive Method of Economic Analysis
Deductive method has the following ‘merits’
1. Deductive method is exceedingly simple. For example, the law that the utility derived by an individual from a commodity goes on diminishing with every successive addition is a self-evident truth from which we may draw many logical conclusions, viz., larger the stock of money, the lower shall be the utility of money; rich persons have lesser marginal utility of money than the poor people; so taxes should not be levied on proportional basis. If taxes are levied proportionately, the sacrifice of the poor will be larger than the rich. This is against the Canon of equity, etc. Thus the principle of progressive taxation is derived from the law of diminishing utility through deductive reasoning.
2. Deductive method obviates the necessity of experimentation. Economics being a social science, experimentation may not be available as in the case of physics or chemistry. So, the next best alternative to experiment is deductive reasoning. According to Boulding this method of deductive reasoning is the method of intellectual experiment.
3. The deductive method results in accuracy and exactness in generalization, because of logical reasoning. The method gives a very high standard of precision in abstract economic reasoning.
Disadvantages of Deductive Method of Economic Analysis
Deductive method has its drawbacks also:
1. Deduction is based mainly on assumptions which are perfectly valid. If assumptions are wrong, generalizations made on the basis of wrong assumptions will be imperfect and invalid. All economic laws are based on too many assumptions where there are more scope for committing errors through wrong hypotheses.
2. In deduction there is too much of abstraction and economists by means of their intellectual exercises produce only “intellectual toys” having little connection with reality.
3. Deductive generalizations started on wrong premises will be dangerous when such generalization claim universal validity. Then such faulty generalizations are made use of in framing government policies, the results would be nothing but disastrous. For example, J.B.Say, claimed universal validity for his ‘Law of Markets’ in which he maintained that supply creates its own demand and there will not be over-production in the market. But this celebrated ‘Law of Market’ was torn to pieces when critics proved that Say’s Law was wrong and overproduction would be possible.
Inductive Method of Economic Analysis
In this method, economists proceed from a practical angle to problems of science to reduce the gulf between theory and practice. Induction is done by two forms, viz. experimentation and statistical form. Facts are collected first, arranged and conclusions are drawn. Then these general conclusions are further verified with reference to actual facts.
The inductive method is generally associated with the statistical form of inductions. The statistical approach has a larger field in economic investigations than the method of experimentation. Further, the method of statistical induction is indispensable for the formulation of economic policy. Malthus presented his famous theory of population only after studying the facts of population in various countries; He then used statistics to support his theory. Similarly Engel, the German statistician employed inductive method and used statistics to formulate his law of consumption.
Advantages of Inductive Method of Economic Analysis
Inductive method has the following merits:
1. It is highly practical add realistic as it describes things as they are.
2. It is helpful in verifying the conclusions of the deductive method.
3. Economic laws under this method are not universal but valid only under certain conditions.
Disadvantages of Inductive Method of Economic Analysis
Inductive method has the following limitations:
1. When the investigators lack a balanced judgement there is the risk of drawing hurried conclusions based on inadequate and irrelevant facts and data.
2. Collection of facts in the inductive process is a highly complex and complicated job warranting extraordinary understanding to alienate economic from non-economic factors.
3. Mere induction alone will not deliver goods unless it is supplemented by means of deductive reasoning. Without deduction, the inductive method would result in producing only a mass of unrelated and unconnected facts.
Deductive or Inductive?
From the above discussion, we can infer that there is no point in pleading one method against the other. The two methods have to be made use of or blended to achieve the required objective. The two methods, deductive and inductive, are not competitive, but complementary in nature helping the investigator.
Induction and deduction are both needed for scientific thought, as the right foot and the left foot are both needed for walking.
Just, like any other matter, the issue, whether deductive method is to be preferred to inductive method or vice versa, became a raging controversy in the last century. The classical school of Britain represented by David Ricardo, Malthus, J.S.Mill, N.Senior, etc., strongly advocated deduction and affirmed their support in deductive methodology. On the contrary the Historical School in Germany represented by Carl Knies, Roscher, Hildebrand, etc., affirmed faith in inductive method. The controversy over methodology went on till Alfred Marshall brought about a compromise.
- Methods of Economic Analysis
- Deductive Method of Economic Analysis
- Advantages of Deductive Method of Economic Analysis
- Disadvantages of Deductive Method of Economic Analysis
- Inductive Method of Economic Analysis
- Advantages of Inductive Method of Economic Analysis
- Disadvantages of Inductive Method of Economic Analysis
- Deductive or Inductive?