The Scientific Method: The Correct and Most Appropriate Method of Inquiry in Economics
Introduction
After writing on the problems and limitations of praxeology and why I believe it is not a good method of inquiry to use in economics, I received several objections following the publication of my essay. Some provided substantive rebuttals that I truly appreciated while others condescendingly claimed that it is because I do not understand praxeology that I am against it—implying that if I understood it, I would not dare to oppose their method. But what is not to understand about the fact that their method is based on subjectivism, and that they simply use logical reasoning, without the help and reliance of any empirical test, to ascertain their subjectivity as valid conclusions. It is quite clear to me; the fundamental issue with praxeology is not the fact that it uses logic. Logic is objective. The problem is that it uses logic as the only tool to support assumptions without testing their validity. But logic alone tells us nothing concrete and tangible about the world and its mechanisms because hypotheses cannot be tested with mere logic.
Economics is not philosophy. It is not a form of a metaphysical or astrological field of study that only requires reason and logic to understand the world around us. Economics is a science. As I argued in my essay entitled The Nature of Economics, economics is a social science because it engages in the scientific study of human behavior and social relationship; it is a positive science because it engages in the objective analysis of the description of social phenomena through empirical data; it is a mathematical science because its indicators are quantitative in nature; and it is a predictive science because, through a measurement process, we are able to predict the occurrence and outcome of economic and social phenomena. Since economics encapsulates all these criteria, it is then clear that the correct and most appropriate method of inquiry in economics is the scientific method.
In this essay, I essentially aim to focus on elucidating the steps of the scientific method in the deductive reasoning process because it is the method that is mostly used to ascertain the validity of a theory in economics. Nonetheless, I remain lucid about the fact that economics is not a hard science like physics or chemistry, or biology. So, of course, I do not reject the role of subjectivity in economics since it deals with human behavior. But I believe that human behavior is empirically testable to some degree because humans tend to repeat actions that benefit them, and therefore, any theory revolving around the study of human behavior and economic relationships must be subject to the scientific method. The scientific method is not perfect but its power of prediction with a certain degree of accuracy is utterly valuable and useful in economics.
Application of the Scientific Method in Economic Theory
How is the scientific method applied in economic theory especially when we want to verify if a hypothesis is valid? There are generally two forms of methods of reasoning in any scientific discipline: deductive reasoning and inductive reasoning. Before answering the question posed, let me first dissect the difference between deductive and inductive reasoning.
1. Deductive reasoning vs Inductive Reasoning
Deductive reasoning is a basic form of valid reasoning.[1] It starts with a general statement, or hypothesis, and examines the possibilities to reach a specific, logical conclusion.[2] The scientific method uses deduction to test hypotheses and theories.[3] Dr. Sylvia Wassertheil-Smoller, who is a researcher and professor emerita at Alberta Einstein College of Medicine put it this way:
“In deductive inference, we hold a theory, and based on it we make a prediction of its consequences. That is, we predict what the observations should be if the theory were correct. We go from the general –the theory—to the specific—the observations.”[4]
Deductive inference conclusions are certainly provided if the premises are true.[5] It is possible to come to a logical conclusion even if the generalization is not true.[6] If the generalization is wrong, the conclusion may be logical, but it may also be untrue.[7]
Inductive reasoning is the opposite of deductive reasoning. Inductive reasoning makes broad generalizations from specific observations.[8] There is data then conclusions are drawn from the data. For inductive reasoning, Dr. Wassertheil-Smoller said:
“In inductive inference, we go from the specific to the general. We make many observations, discern a pattern, make a generalization, and infer an explanation or a theory.”[9]
Overview of the deductive and inductive reasoning
Figure 1
In economics, specifically in theoretical economics, the deductive method is the most used to determine the validity of a hypothesis.
2. Process of the Deductive Method in Economic Theory
The scientific method requires hypothesis testing. Experiments test hypotheses and ultimately prove them right or wrong.[1] Based on this acceptance or rejection of a hypothesis, scientists go back to their original theories and revise them as needed.[2] In economics, the validation or rejection of a theory is subject to the following process staged in five steps:
(1) Perception of the problem to be inquired into
(2) Precisely define the technical terms and making appropriate assumptions
(3) Deduce hypotheses, that is deriving conclusions from the premises through the process of logical reasoning
(4) Testing the hypothesis deduced against the data
(5) Analyzing the result of the test to conclude they either prove or disprove the theory
Let me now attempt to give a thorough elucidation of each part of the process. Let me start with the obvious one, which is the problem.
(1) Perception of the problem
In economic inquiry, the economist must have a clear idea of the problem to be inquired.[3] He must understand and know the variables that will be part of the formulation of his theory. The scope of the problem must be broad, and somewhat nebulous.
(2) Technical Terms and Formulation of assumptions
Once the problem is perceived and defined, the next step that the economist takes is to make the problem less nebulous. That means that he must commence giving a technical connotation to the keywords that are part of the problem perceived. These keywords are the actual variables. Once the keywords are defined in technical terms, the economist then formulates a hypothesis. The hypothesis formulated becomes the theory.
Assumptions may be behaviorally pertaining to the behavior of economic variables, or they may be technological relating to the state of technology and the factor endowments.[4] The actual economic world is considerably complex and full of details in which numerous factors play a part and act on each other.[5] Thus, the introduction of simplifying assumptions is quite necessary in order to bring out the importance of really significant factors having a bearing on the problem under investigation.[6] Hence, this could sometimes lead to the formulation of assumptions that may not be entirely realistic. The formulation of a hypothesis is mandatorily a priori in the deduction method.
(3) Deducing Hypotheses Through Logical Deduction
A hypothesis describes a relationship between factors affecting a phenomenon; it establishes the cause-and-effect relationship between the variables having a bearing on the phenomenon.[7] It is only through a logical process that a hypothesis can be deduced but not verified. There are generally two kinds of tools used in logical reasoning when a hypothesis is being deduced. There is the verbal reasoning approach and there is the mathematical approach. Both approaches are a priori.
In order to test the validity of the hypothesis being inquired though, it is necessary to use mathematical tools because mathematics enables the quantification of hypotheses by building mathematical models. First, using the mathematical approach ensures the clarity of the assumptions and the accuracy of the variables that needed to be tested. The quantification of a hypothesis permits the hypothesis to be rigorously tested with quantitative data and using quantitative data helps the economist determining the predictive power of his model. However, a mathematical model does not prove or disprove a theory. It is only the logical reasoning of a hypothesis expressed in mathematical language.
The verbal reasoning method is not sufficiently strong to determine the predictive power of the hypothesis being inquired because there is no way to test empirically the validity of the assumptions merely with plain words.
So far, nothing has been proven to be tangibly true. The deduction of the hypothesis through logical reasoning only tells us “If…then.” It merely sets the path to its verification, which can only be done empirically. It is important to understand that so far, from the first stage to the third stage, the inquiry is done through a priori means.
(4) Testing the Hypothesis Deduced Against the Data
This is perhaps the most crucial part of the entire inquiry process. Hypotheses obtained above have to be verified before they are established as generalizations or principles of economics.[8] For the verification of hypotheses, economists cannot make controlled experiments because they have to discover uniformities in the behavior patterns of man.[9] Since experiments cannot be run under controlled conditions[10], economists use historical data and assess the past values of the data to determine and predict future values. Hence, they generally use several statistical methods to test the validity of the hypotheses deduced.
The various statistical methods such as regression analysis have been developed to empirically test the economic hypothesis on the basis of collected economic data, and the merit of econometrics is that the degree of functional relationships between relevant economic variables in precise quantitative terms is obtained by it and also the level of significance of the results can also be estimated.[11] It is, however, important to emphasize that statistical methods alone also cannot be used to derive economic laws and principles. The hypotheses or theories must be developed logically before we can meaningfully use statistical analysis to test and verify them.[12]
(5) Analyzing the Results of the Test to Conclude if the Theory is Valid or Invalid
Once the hypotheses have been tested, the results obtained show us if the theory is indeed valid or invalid. If the data confirm the hypothesis, then the theory is valid and becomes an economic principle. If the data contradict the hypothesis, then the hypothesis needs to be refined until it gets it right. More importantly, the result obtained from the test must be reproducible. That is the gist of the scientific method.
Conclusion
The scientific method is not a flawless method of inquiry. It does have its limitations. However, it is the most appropriate method used in any scientific field of study whether is it in the social sciences or the natural sciences. When applying the scientific method in economic inquiry, it is preponderant to fathom that from the perception of the problem to the deduction of the hypothesis, this process is done through a priori reasoning. At this stage of the inquiry process, no theory has been proved or disproved. Only the theoretical framework of the hypothesis has been established. Once the theoretical framework of the hypothesis is established, the hypothesis itself ought to be tested in order to establish its validity. The scientific method is the correct method of analysis to use in economics. Economics, in every academic institution in the world, is taught as a positive science with the scientific method as its method of inquiry. Every organization that deals with economic and financial issues, use the scientific method to reach their conclusions.
Since economics is not an exact science, the debate about economic methodology has been an everlasting debate between those who believe that economics is a positive science and those who believe that economics is a normative science. Economists will perhaps never unanimously agree on what is the exact, undeniable, and beyond-dispute method of inquiry in economics. But most economists do agree that the scientific method provides a more objective approach to economic analysis. This essay clearly elucidates where I stand on this debate. I now rest my case.
References
[1] Phillips, Kerk. “Economic Theory Uses Scientific Method” DeseretNews. (2013). [2]DeseretNews. Ibid. [3] Supriya, Guru. “Methods of Economic Analysis: Deductive Method and Inductive Method” Your Article Library. [4]Your Article Library, Ibid. [5]Your Article Library, Ibid. [6]Your Article Library, Ibid. [7]Your Article Library, Ibid. [8]Your Article Library, Ibid. [9]Your Article Library, Ibid. [10] Controlled conditions also known as Randomized Controlled Trials are experimental methods that are significantly growing in economics. [11]Your Article Library, Ibid. [12]Your Article Library, Ibid.
[1] Bradford, Alina. “Deductive Reasoning vs Inductive Reasoning” Live Science. (2017). [2]Live Science, Ibid. [3]Live Science, Ibid. [4]Live Science, Ibid. [5]Live Science, Ibid. [6]Live Science, Ibid. [7]Live Science, Ibid. [8]Live Science, Ibid. [9]Live Science, Ibid.