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The Scientific Method

Economic thinking is scientific thinking. Economists approach economics in much the same manner as chemists approach chemistry and physicists approach physics. The social and physical sciences share a common approach to organizing, analyzing, and explaining information. Economists often use an inductive or deductive approach to form generalizations, economic theories and laws, and solutions to problems.

The inductive approach begins by identifying a problem and then collecting and organizing relevant data. From this data, the economist forms one or more generalizations to note general tendencies about the problem or issue. A generalization may be prefaced with words such as “in most cases” or “rarely” to indicate that it is really a statement of probability and that there may be exceptions to the general rule. Generalizations must be tested in a real-world setting.

The deductive approach, on the other hand, begins the scientific inquiry by forming a hypothesis using just general observations or impressions about an economic issue or problem. The economist then collects, organizes, and analyzes data related to the topic. Before the hypothesis can be validated, it must withstand the scrutiny of testing in the real world.

A generalization or a hypothesis that survives repeated testing over time earns the title of economic law. For example, the most famous economic law, the law of demand, states that consumers buy more of a good when its price is low and lesser amounts of a good when its price is high. While the law of demand seems to be little more than a statement of common sense, it wasn't until the nineteenth century that economists were able to devise a demand curve to illustrate the relationship between price and the quantity demanded of a good. Economic laws state general tendencies about people's economic behaviors but are not perfect predictors of their actions. There are even exceptions to the famous law of demand. A higher price for certain luxury goods, such as name-brand watches or custombuilt automobiles, actually increases the demand for these status products.

Fallacies in Reasoning

A fallacy occurs when an error is made in one's research or reasoning that, in turn, results in erroneous conclusions. There are several types of fallacies that plague the study of economics and the other social sciences.

A cause-effect fallacy occurs when an incorrect or incomplete relationship is drawn between one event and another. One type of cause-effect fallacy is the single-cause fallacy, which identifies just one cause or one solution to a complex problem when in reality there are multiple causes or solutions. The single-cause fallacy is often called oversimplification because the economist's reasoning excludes key variables related to the problem. A second type of cause-effect fallacy is the post hoc fallacy, which assumes that because one event happens before another event, the first must have caused the second to occur. A third type of cause-effect fallacy is the correlation-as-cause fallacy, which assumes that because two events occur at about the same time, one must have caused the other. In the study of economics, many events occur before, at the same time, or after other events. At times these events are related, even causal, and at other times they are not.

An evidence fallacy occurs when an economist's conclusions are based on insufficient, irrelevant, or inaccurate information. Evidence fallacies may be intentional (to promote a certain position or policy) or unintentional. In either case, the economist's conclusion is tainted by faulty evidence.

The fallacy of composition assumes that what is true or proper for a piece is true or proper for the whole. In the study of economics, what is good or appropriate behavior for an individual (the piece) is not necessarily the proper behavior for the entire society (the whole). For instance, it is commonly agreed that monthly household budgets for individuals should be balanced to ensure that all bills are paid. On the national level, however, budgetary deficits are sometimes viewed as necessary to moderate downturns in the economy, as was the case during the Great Depression of the 1930s and the Great Recession of 2007–2009.

 
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