NATURE AND NATURE AND METHODS OF METHODS OF ECONOMICSECONOMICS

AUSAF AHMADAUSAF AHMAD

Presentation on November 21Presentation on November 21stst 2007 2007At At

Aligarh College of Engineering and ManagementAligarh College of Engineering and ManagementAligarh U.P. Aligarh U.P.

Dominance of Economic Dominance of Economic IssuesIssues

Dominance of economic issues Dominance of economic issues in social discussions.in social discussions.

Economics has become the Economics has become the intellectual religion of the day. intellectual religion of the day.

Lack of economic literacyLack of economic literacyEconomic education Economic education

CLASSIFICATION OF CLASSIFICATION OF KNOWLEDGEKNOWLEDGE

KNOWLEDGE

DivineKnowlege

Human Knowledge

Arts Sciences

Natural Sciences

Social Sciences

NATURAL SCIENCESNATURAL SCIENCES

NATURAL SCIENCES

MATHEMATICS

ASTRONOMY

PHYSICS

Chemistry

Biology

SOCIAL SCIENCESSOCIAL SCIENCES

SOCIALSCIENCE

S

ECONOMICS

SOCILOGY

POLITICS

ANTHROPOLYGY

HISTORY

PSYCHOLOGY

DIFFERENT APPROACHES TO DIFFERENT APPROACHES TO ECONOMICSECONOMICS

Classical approach: Smith, Ricardo, J.B. SayClassical approach: Smith, Ricardo, J.B. Say– Economics is the Science of Wealth.Economics is the Science of Wealth. Critique of Classical Approach: Marx and CarlyleCritique of Classical Approach: Marx and Carlyle ““Dismal Science” and “Bread and Butter Science”Dismal Science” and “Bread and Butter Science”

Neo Classical Approach:Neo Classical Approach:—Economics studies human welfareEconomics studies human welfare

Modern Approach:Modern Approach:—Economics studies how unlimited wants could be Economics studies how unlimited wants could be

fulfilled with limited resources. It is a science of fulfilled with limited resources. It is a science of choice. choice.

Economic goods and Free Economic goods and Free goodsgoods

Distinction between Distinction between economic goods and Free economic goods and Free goods. goods.

Scarcity as a fact of Scarcity as a fact of economic lifeeconomic life

There is nothing like a There is nothing like a Free lunch.Free lunch.

Economy and Economic Economy and Economic organizationorganization

Meaning of EconomyMeaning of Economy An economy is a organization of An economy is a organization of

human beings through which they human beings through which they carry out certain basic economic carry out certain basic economic activities such as production, activities such as production, exchange, distribution and exchange, distribution and consumption to fulfil their needs. consumption to fulfil their needs.

Basic Functions of an EconomyBasic Functions of an Economy

BASIC FUNCTIONS OF AN BASIC FUNCTIONS OF AN ECONOMYECONOMY

WHAT TO PRODUCE? [issue of WHAT TO PRODUCE? [issue of Allocation of Resources ]Allocation of Resources ]

HOW TO PRODUCE [ issue of choice HOW TO PRODUCE [ issue of choice of techniques ]of techniques ]

FOR WHOM TO PRODUCE [ issue of FOR WHOM TO PRODUCE [ issue of Distribution of the produce Distribution of the produce

PRODUCTION POSSIBILITY PRODUCTION POSSIBILITY CURVECURVE

Substitution between Guns and Butter

Guns in thousands

Butter in thousand kg

Y1

Y2

Y3

YC

XC

x1 x2 x3

DIFFERENT VIEWS OF DIFFERENT VIEWS OF ECONOMYECONOMY

CONSUMPTION UNITSCONSUMPTION UNITS

households

Economy

Individuals

DIFFERENT VIEWS OF DIFFERENT VIEWS OF ECONOMYECONOMY

PRODUCTION UNITSPRODUCTION UNITS

Economy

Sectors

f

industries

Sectors

Firms

DIFFERENT VIEWS OF DIFFERENT VIEWS OF ECONOMYECONOMY

EXCHANGE UNITSEXCHANGE UNITS

Economy

Markets

METHODS OF ECONOMIC METHODS OF ECONOMIC INQUIRYINQUIRY

Theoretical MethodsTheoretical Methods Empirical MethodsEmpirical Methods Both Methods are used in EconomicsBoth Methods are used in Economics No method is superior or inferior to No method is superior or inferior to

other. other. Each method has its own limitation.Each method has its own limitation. To judge an economic data (result, To judge an economic data (result,

principle or theory) one must consider principle or theory) one must consider how it has been arrived at. how it has been arrived at.

THEORETICAL AND EMPIRICAL THEORETICAL AND EMPIRICAL METHODSMETHODS

Real World

Conclusions Conclusions about the about the Real World. Real World.

Experimental Design

Experiment

Result of Experiment

Logical Model

Logical Reasoning

Logical Conclusion

Theoretical

Abstraction

Experimental Abstraction

Statistical

Interpretation Theoretical Interpretati

on

Deductive and Inductive Deductive and Inductive logiclogic

Deductive logic. Deductive logic. – Major and Minor PremisesMajor and Minor Premises– Conclusion is correct if major premise is Conclusion is correct if major premise is

correct. For example:correct. For example:

All human beings are mortal.All human beings are mortal.

John is a human being.John is a human being.

John is mortal. John is mortal.

Necessarily TrueNecessarily True

Deductive and Inductive Deductive and Inductive logiclogic

Incorrect Premises lead to incorrect Incorrect Premises lead to incorrect conclusions:conclusions:

All Men are StupidAll Men are Stupid

John is a manJohn is a man

John is stupid.John is stupid.

Not necessarily trueNot necessarily true

Deductive and Inductive Deductive and Inductive logiclogic

Inductive Logic:Inductive Logic:John is stupidJohn is stupid

Tom is stupidTom is stupid

Jack is stupidJack is stupid

John, Tom and jack are humansJohn, Tom and jack are humans

Therefore, all humans are stupid.Therefore, all humans are stupid.

Not Necessarily TrueNot Necessarily TrueBased on the Law of Uniformity of Based on the Law of Uniformity of

Nature, which is itself unproved. Nature, which is itself unproved.

MICRO AND MACRO MICRO AND MACRO ECONOMICSECONOMICS

Micro economics is the study of Micro economics is the study of functioning of one unit of the functioning of one unit of the economy i.e. an individual, a economy i.e. an individual, a household, a market etc. household, a market etc.

Macro economics is the study of Macro economics is the study of functioning of full economy, different functioning of full economy, different units interacting with each other.units interacting with each other.

It is not correct to say that one is It is not correct to say that one is more important or more correct than more important or more correct than the other. the other.

SOME CRITIQUE OF MODERN SOME CRITIQUE OF MODERN ECONOMICSECONOMICS

Modern Economics is not value neutral as claimed Modern Economics is not value neutral as claimed by positivist. by positivist.

One may not accept value premises of modern One may not accept value premises of modern economics. For example, family is unit of analysis economics. For example, family is unit of analysis in developing countries while individual is center in developing countries while individual is center of analysis in modern economicsof analysis in modern economics

Modern economics assumes and treats man as Modern economics assumes and treats man as homo-economicus, motivated only by self homo-economicus, motivated only by self interest. interest.

The economy is perceived to be driven only by The economy is perceived to be driven only by Profit motive. There may be other motives of Profit motive. There may be other motives of economic behavior. economic behavior.

Modern economy gives more weight to efficiency Modern economy gives more weight to efficiency in comparison to equity and justice. in comparison to equity and justice.

EPILOGUEEPILOGUE

THANK YOUTHANK YOU

FORFOR

YOUR TIME AND YOUR TIME AND CONSIDERATION.CONSIDERATION.