Monday, May 11, 2009

Inductive and Deductive Methods in Economics

Lately, as a consequence of the economic events, the way economics should work as a scientific method and as a social science has been challenged. Eichengreen addresses how Economics should aim to a more inductive analysis fashion.

There are a few points in the same spirit that should be taken into analysis. First, is ever more clear that mathematical models are useful to test facts observed in reality. It is indeed frustrating that there are thousands of tons of papers about economics written, and despite the latter, bubbles in financial markets exist and policy makers are doubtful of the effects of public spending and tax multipliers.

Second, it's true, economic theory has advanced considerably in microeconomics, game theory, even in macro theory, however it is rather slow the process of applying theory to economic policy. Naturally, the question rose: when will developments in theory will help policy makers?

In years to come is fairly likely that research in macro will have to address specific problems, which prove directly related to reality and not with theoretical problems, such as existence or uniqueness of equilibrium.

This in turn gives an advantage to the keynesian and new keynesian economics approaches, as opposed to the classical one, the former are far easier to contrast in reality.

The latter implies that all of us who are interested in macro will have to put a lot -more- effort to empirical and programing techniques, whether they come from econometrics or from calibration.

All of the latter shows that the deductive method, in which a chain of logical facts is sufficient in order to prove one hypothesis has been seriously challenged.

Theory based in the deductive method should be regarded as a first step in the analysis, yet, making decisions without the appropriate empirical -inductive- evidence should be avoided.

An illustrative example of the latter appears in the interview Catherine Mansell made to Arnold Harberger. Harberger emphasizes that every economic policy recommendation and economic theory assertion must come from sound contrast with reality.

It is true, econometrics sometimes looks like some black magic that would tell the researcher what he wants to hear. This approach of econometrics should be corrected too.

Economists as social science researcher must base any conclusion in observation, with the valuable help of formality provided by mathematics.

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