The Scope and Method of Economics

“Economic is the science of the administration of

scarce resources in human society.”

Readings Lange, Oliver. (1945). The Method and Scope of

Economics. Review of Economic Studies. Vol. 13, Issue 1, pp. 19-32.

Read, Leonard, (1958). I, Pencil. The Freeman. Landsburg, Steven. (1993). Chapter 24: Why I Am Not

An Environmentalist: The Science of Economics Versus The Science of Economics, from The Armchair Economist.

Buchanan, James. (1979). Chapter 1: What Should Economists Do? and Chapter 2: Is Economics The Science of Choice? from What Should Economists Do?

Sample Questions1.

(a) Lange (1945) defines economics as “the science of the administration of scarce resources in human society”. What does he take this to mean?

(b) Distinguish briefly between theoretical economics, applied economics and welfare economics.

(c) Lange suggests that “the statements of economic science have objective validity”. What does he mean by this? Why do disagreements arise in economics?

(d) Distinguish between an ideology and a science. Do you think economics is an ideology or a science?

 

2. Alfred Marshall in 1890 defined economics as “the study of man in the ordinary business of life”. Lange (1945) took this and defines economics as “the science of the administration of scarce resources in human society”. Buchanan (1979) suggests that the “proper subject for economists is man’s behaviour in market relationships, reflecting the propensity to truck and to barter and the manifold variations in structure that these relationships can take”.Outline and compare Lange’s view of economics as a “science of choice” with Buchanan’s view of economics as a “science of exchange”.

1. What concept is illustrated by Leonard Read’s short article I, Pencil? [Do not repeat the narrative of the story.]

2. Economists apply Cost-Benefit Analysis (CBA) to examine the outcome of a decision or change. This allows a comparison of the gains and losses that arise in many situations.

  Outline briefly the advantages and disadvantages associated with one of the following issues. Also state whether it is possible to determine whether the change will be on the whole good or bad for the factor listed?

• Increased paper recycling on the number of trees.

• Increased car safety features on accidents and injuries.

• Reduced use of chemical crop pesticides on cancer rates.

Wants and Needs

Human beings experience wants. Some wants results from biological needs which must be satisfied for the very preservation of life.

Most wants, however, are products of life in a civilised society.

Resources

The wants can be satisfied by means of the appropriate objects called goods or of persons called services.

The goods and services are the resources which serve to satisfy human wants.

Some of the resources are some plentiful that all wants dependent on them can be fully satisfied.

Scarce Resources

Many resources, however, exist only in quantities which are not sufficient to satisfy all wants dependent on these resources.

In this case we say that resources are scarce.When resources are scarce certain wants must

go unsatisfied. Decisions determine the distribution of the scarce resources among different wants.

These decisions are the subject matter of economics.

Economics as a Social Science

The ways in which scarce resources are procured, adapted and distributed are all the result of social organisations and social institutions.

Economics is thus a social science.• Science: Organised body of knowledge

• Social: Deals with human behaviour.

Economics is a subject which depends on the standards and forms of life in human society.

General Patterns of Uniformity

Like any other science, economic is not content with merely descriptive knowledge.

It tries to discern general patterns of uniformity in the administration of scarce resources.

This is possible based on two observed facts.

1. Human actions with regard to scarce resources are subject to uniform patterns of repetition.

2. The uniformities in economic action of individuals or groups of individuals produce certain uniformities in the distribution of scarce resources.

Theoretical EconomicsThe branch of economics which deals with such

patterns of uniformity and combines them in a coherent system is called theoretical economics.

Statements of the patterns of uniformity are referred to as economic laws. Theoretical economics puts the patterns of uniformity in a coherent system.

This is done by presenting the laws of economics as a deductive set of propositions derived from the rules of logic (and of mathematics) from a few basic propositions.

The basic propositions are called assumptions, the derived propositions are called models or hypothesis.

Theoretical economics provides hypotheses or models based on generalisation of observations and empirical test. Such empirical tests is the based to applied economics.

Econometrics deals with the procedure of verification of hypotheses and models, and is based on mathematical statistics.

Applied Economics

The administration of scarce resources can be evaluated in terms of certain social objectives.

Such objectives may consist in the best satisfaction of the wants of private persons or marshalling scarce resources for certain collective enterprises.

The social objective being given, rules of use of scarce resources can be found which are most conducive to the attainment of these objectives.

This provides the subject matter of welfare economics.

Welfare Economics

I, Pencil

How much knowledge goes into the production of a single pencil?

How many people are involved in the complete production process of a pencil?

How much does a pencil cost?

The statements of economic science have objective validity.

If two or more people start with the same assumptions, they are bound, by the rules of logic, to derive the same hypothesis or model.

The test of verification decides whether the assumption are adequate or not. If not, they have to be replaced by new ones which lead to models able to stand the test of verification.

The Objectivity of Economics

The final verdict with regard to any statement of economic science is thus based on an appeal to the facts, i.e. to empirical observations.

This verdict has interpersonal validity because the facts are interpersonal, i.e. can be observed by everyone. There is a large degree of agreement among economists.

Economists, however, are rather notorious for being unable to reach agreement and being divided into opposing schools of thought.

Agreement in Economics

The disagreements, such that they exist, can be traced to one or more of the following sources.

1. Disagreement about social objectives.

2. Disagreement about facts.

3. Failure to abide by the rules of logic.

The disagreements are the failure to abide by the rules of scientific procedure.

Disagreement in Economics

Economists are not automatons and as human beings they are subject to a great multiplicity of influences, some conscious, most subconscious, which determine their conclusions as laid down in the literature of economics.

Economists, like all others, live under the institutions of a historic society and under the standards of its civilisation.

They share in its beliefs and values, prejudices and interests, horizons and limitations.

Economists are brought up as members of a particular nation, social class, religious or philosophical group, and political tradition etc.

Many of these influences are conscious and easily overcome with honest application of scientific procedure.

The really important influences are subconscious.

The result is the production of ideologies.

Ideologies

These are systems of beliefs which are not held on the ground of their conformity to scientific procedure but as rationalisations of subconscious, non-logical motives.

Ideologies have no interpersonal validity.

They convince only those who share the same subconscious motivations and undergo the same process of rationalisation.

The Science of Economics versus the Ideology of

Environmentalism

Why might recycling paper lead to a reduction in the number of trees?

Why might a reduction in pollution be bad for society?

What might a ban on pesticides with fruit and vegetable crops lead to an increase in cancer?

Are species extinctions bad?

What is seen and what is unseen