Methods of Economics:Deduction and Induction
Like any other science, Economics also has its laws or generalisations.These laws govern the activities in the various divisions of Economics such as Consumption, Production, Exchange and Distribution. The logical process of arriving at a law or generalization in a science is called its method.
Economics uses two methods:deduction and induction.
a. Deductive Method of Economic Analysis
It is also named as analytical or
abstract method. It consists in deriving
conclusions from general truths;it takes few general principles and applies them to draw conclusions. The classical and neo-classical school of economists notably, Ricardo, Senior,
J S Mill, Malthus, Marshall, Pigou,applied the deductive method in their economic investigations.
Steps of Deductive Method:
Step 1:The analyst must have a clear and precise idea of the problem to be inquired into.
Step 2:The analyst clearly defines the technical terms used in the analysis.Further, assumptions of the theory are to be precise.
Step 3: Deduce hypothesis from the
Step 4: Hypotheses should be verified
through direct observation of events in the real world and through statistical methods. (eg) There exists an inverse relationship between price and quantity demanded of a good.
b. Inductive Method of Economic Analysis
Inductive method, also called empirical
method, is adopted by the “Historical School of Economists”. It involves the process of reasoning from particular facts to general principle. Economic generalizations are
derived in this method, on the basis of
(ii) Observations; and,
(iii) Statistical methods.
Step 1: Data are collected about a certain economic phenomenon. These are systematically arranged and the general conclusions are drawn from them.
Step 2: By observing the data,conclusions are easily drawn.
Step 3: Generalization of the data and then Hypothesis Formulation
Step 4: Verification of the hypothesis (eg.Engel’s law)
According to Engel’s Law “The proportion of total expenditure incurred on food items declines as total expenditure [which is proxy for income] goes on increasing.”
Economists today are of the view that both these methods are complementary. Alfred Marshall has rightly remarked: “Inductive and Deductive methods are both needed for scientific thought, as the right and left foot are both needed for walking”.
Using the methods, the economist
observes facts, such as, changes in the price
of a commodity. Similarly, the quantity
demanded of that commodity also varies.And he observes these movements and comes up with a theory that these two movements are inversely related, i.e., when the price increases, the quantity demanded of that commodity decreases and vice versa. Thus, he formulates his theory of demand. He tests his theory by collecting further facts and when his theory stands the test of time and obtains universal acceptance,the theory is raised to the status of a law.