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Methodological Issues In Economics

Methodological Issues in Economics
Methodology in economics refers to the various manners and practices used by economists to discern, comprehend, examine and evaluate economic phenomena. Like economists are occupied in investigating economic phenomena following almost alike procedures. As methods of study that also make use of inference and initiation. But the laws or simplifications devised by them are fairly diverse from other sciences for the reason that their nature of postulation in economic theory.

Nature of Economic Theory

Meaning - Economics is a science. It is structured body of theoretical information which is based on facts. Facts are based on verified postulations and obtain the name theory. A theory explains a informal affiliation between cause and effect. It is a set of hypothesis about the way in which the globe performs. The connotations and prophecies of a theory can be examined by the course of surveillance and statistical analysis of the facts.

Steps of Economic Theory

  • Selecting the Problem

    The first step is selection of a problem such as poverty, unemployment, deflation etc. In case of industries the problems may be narrower. If the problems are narrower, approach becomes easier. Hence enquiring of the problem by the researchers becomes satisfactorily.

  • Collection of Data

    Once when the problem to be researched is selected, the next step is collecting facts and figures which support problem analyses. Economic principles are applied only after cautious interpretations, the laws relating to such interpretations are law of diminishing returns, the Malthusian theory of population, the marshallian price theory etc.

  • Classification of Data

    After the collection process, the data collected are itemised, categorized and evaluated. It is the consortium of data or information according to their similarities and disparities and note to assessment and compare. Thus enumeration, classification and analysis of statistics are essential to scientific theory.

  • Formulation of Postulations

    The next stage is to formulate the postulations of the data. Postulation is a suggested answer to a problem by the support of which we enterprise to elucidate facts by determining their regulations. The Postulation arises from the experiential facts, practices of preceding awareness of the researcher. These postulations are tested with economic theories and if it matches with the facts then the postulations become theory else is a failure attempt.

  • Formulation of Solutions

    Once when the theory is established factual, feasible elucidation of the problem can be framed. This is indispensable in the case of social sciences like economics since economists be inclined to be socially oriented and do not like expending their vigour on minor and immaterial issues.
Uses of Economic Theory

Economic theory provides us with implements of economic analysis that helps in amplifying economic fact in envisaging economic actions, in reviewing the performance of the economy and in devising economic policies. The implications are to provide economic tools, to explain economic phenomena, to predict economic events, to judge the performance of economy, to formulate and understand economic policies and to evaluate economic policies.

Limitations of Economic Theory

Even though the economic theory posses merits, it has certain demerits or limitations. Accurate data are not available, accurate prophecies are not possible, Human behaviour won't be rational, imaginary postulations and are not fully applicable to economic policies. Economic theory may be correct for today's atmosphere but may become outmoded in future. For example, if we try to apply the profit maximisation theory of the firm on a particular industry, our conclusions might go wrong when there is no perfect competition prevailed in practice of the industry. Hence whatever discussed as merits might not work out for the change in market conditions and hence the theory concepts limits.

Economic Theories and Policies

Economic policy endow with a realistic shape to economic theory. In theory we apply economic principles for analysing the actual conditions of the economy. Economic theory and policy are intimately associated to each other. For economic policy to be successful, it has to be formulated on the basis of economic theories.

Priorly, an economist has to know the goals of economic policies. The goals of economic polices may be fiscal development, full employment, price stability, eradication of poverty and even-handed allocation of revenue and wealth.

Second, if suppose, an economist is asked to offer advice about the ways in which unemployment can be condensed, the goal is balancing and overlaps the goals of eradication of poverty and even-handed allocation of earnings and wealth. But it disagrees with the goal of price stability. So he will have to think out how much unemployment can be persistent with a lowest of inflation.

Third, he will have to collect data or if they are readily available can arrange and construe in the glow of the existing theories of unemployment in order to find out the grounds of unemployment. Lastly he has to find out the feasible effects of these methods on the economy. This involves precise perceptive of the economic impact, costs and political feasibility of alternate programs.

Failure of Economic Theory and Policies

The application of economic theory to economic exertions irrespective of time and place has led to the failure of many economic policies applied with fine objectives. The reasons for such failures have been as under.

The applicability and exactness of an economic theory depends upon the fact whether the postulations of the theory are in observance with the definite economic stipulation on which the economist wants to pertain. If the postulations are not in concurrence with the definite circumstance the outcome may be wrong.

Subsistence of particular circumstance in the nation which happens to be dissimilar from those measured in the theory. Such a circumstance occurs when efforts are made to apply economic theories intended for developed nations on the developing economies.

An economic theory which is the source of a policy determine at one time in the economy cannot be true for all times since an economy is dynamic, changing organism. An economic theory which is accurate at present may turn out to be outmoded tomorrow and the policy on this might also turn into ineffectual.

Professor Lipsey, has said about the failure as "Even a perfectly consistent theory may be utterly wrong and this can be found out by testing it against observation. A significant advance in the use of economics in policy matters would be achieved if people accepted the statements of economists only after they had asked 'what is the evidence?' and 'Has this theory been subjected to a test where it had a real chance of meeting with conflicting evidence?"

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