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Home Columns Economics and Business Forum

Economics for citizens 2

by Johnny Kasalika
27/08/2012
in Economics and Business Forum
4 min read
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Economics is said to be a science subject, albeit a social science.

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It makes use of some methods used in the natural sciences such as physics, chemistry and biology.

But it mostly uses observation to formulate principles not laboratories. Society or the community is its laboratory.

Economists use such terms as are used in natural sciences as law, principles, theories and models.

These terms mean almost the same thing; generalisation or statements of regularity concerning the economic behaviour of individuals and institutions.

Some people say the term ‘economic law’ is a bit misleading because it implies a high degree of exactness such as the law of gravity.

It is neither universal in application nor has it moral connotation. It is about tendencies in the behaviour of economic events.

Some people incorrectly associate the term principle or theory with pipe dreaming, divorced from the facts and realities of the world.

The term is preferred by some economists when it means a simplified picture of reality, an abstract generalisation of how the relevant data actually behave.

Generalisation

Economic principles are generalisations made up of imprecise quantitative statements such as when the price of meat rises, the demand for it falls. When the price of maize falls, some farmers turn their land to growing of other crops. No figures are given.

Other things, equal assumptions

Like other scientists, economists make use of the ceteris paribus assumption in formulating laws or principles. It means ‘other things being equal,’ they assume other variables to be constant.

When they say a rise in prices causes demand for meat to fall, they assume that buyers’ incomes have not risen. Since the price of meat rose, suppose buyers’ wages and salaries also rose, they will continue to buy as much meat as before or even more.

Economic principles or theories are abstractions. They do not encompass the whole range of an economic phenomenon. Economists theorise to give meaning to what appear to be facts, but are only a branch of confusing words.

An economic theory is a model or a sample of a whole of the economy. This model enables us to understand reality better because it dispenses with the details of reality which would be difficult to grasp.

Induction and deduction

To arrive at principles, economists use either or both induction and deduction. With the induction method economists first accumulate facts, arrange them systematically and analyse them to permit generalisation or a principle. Induction moves from facts to theory, from particular to the general.

After observing a few facts, an economist may arrive at a hypothesis or apparent principle. He then proceeds to gather more facts to validate his theory. This is the deductive method. The deductive method goes from the general to the particular, from theory to facts.

Policy economics

Economic principles help us in two ways. First, they help us to understand why prices rise or fall, the causes of unemployment, economic growth, why shortages or surpluses of certain goods and services take place.

Secondly, and perhaps even more important, economic theory is the basis for economic policy. By economic policy, we mean what we would like to do about certain economic problems.

If there is inflation, what do we want to do about it? To create employment, what action should we take? For such policies to work, we must apply principles of economics among other forms of action.

Values

In the course of implementing economic principles value judgements crop in. This means we are no longer just concerned with digging facts, but also expressing opinions on what is desirable and what is not.

Descriptive economics and economic theory are both concerned with facts; policy economics involves value judgement as to the desirability of certain events. When operating at this level, economists are no longer scientists, but policy makers. They are no longer dealing with what things are like, but what they ought to be. They are concerned with values.

Economic principles help both businesses and governments to make predictions, to foresee what might happen. The law of demand states that a fall in price increases demand while the rise, decreases demand for goods. With this principle, the merchant decides whether to increase or reduce prices.

Economic goals are as follows:

1.   Economic growth. The production of more and better goods and services.

2.   Fall employment. Suitable jobs should be available for everyone who wants them.

3.   Price stability. Inflation and deflation should be avoided.

4.   Economic freedom. Businesspeople, workers and consumers should enjoy a high degree of freedom.

5.   An equitable distribution of income. No group of people should face starvation while another group basks in luxury.

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