Methodology

Economics is a science resting on the postulate (or axiom) of selfishness to explain and predict human behavior.

Economics is regarded as a science because it uses the same methodology used in other sciences. •Methodology refers to the set of methods used in the study of something.

Axioms / Basic postulates • An axiom is a common believe (assumption) that is accepted as a starting point of a discipline. • All empirical sciences, including Economics, share an axiom that events do not happen accidentally, but follow some universal rules or patterns.

Axiom (or postulate) of selfishness • is also known as ‘the postulate / axiom of constrained maximization” • we assume that people always maximize their self-interest under constraints • The exact entity (things to be maximized) has to be specified. The entity can be wealth, income, utility, etc.

Economics aims to explain and predict human behaviors / choices • Predictions and forecasts are not the same. • Predictions must be made in the form of “If A happens, then B will follow.” [e.g. “If a per-unit tax is imposed on a good, the price of the good will increase (and the quantity transacted will fall).”] • Forecasts may be derived from established trend, from a crystal ball, from the “sixth sense”, etc.

Attributes of a Useful Theory • Must be able to derive refutable implications • A useful theory is refutable (i.e. must have refutable implication) by evidence but not yet be refuted.

Must be able to derive refutable implications • To be testable, both the antecedent and consequent need to be observable. • “If A happens, then B will follow.” antecedent

consequent

[e.g. “If a per-unit tax is imposed on a good, the price of the good will increase (and the quantity transacted will fall).”]

A theory could never be proved • If implications of the theory are supported by evidence, the theory is said to be confirmed • If implications of the theory are not supported by evidence, the theory is said to be refuted

Tautology • A tautology is a statement that is always true (or it cannot be conceivably false).

The following statements are tautologies: • 1) A definitional identity • (e.g. If a good is a free good, its quantity available must be sufficient to satisfy all our wants.) • 2) The only logical implication • (e.g. If a good is a free good, its price must be zero. ) • 3)  Exhaust all the possibilities • (e.g.  If the wage rate increases, the working hours may increase, decrease or remained unchanged. )

Other examples of Tautologies •黃興 桂 ( 足球 評述員 ) 金句 •除非 有一隊 先入 一球 ,  如果 唔係都 幾難 開到紀 錄啦呢 場波 •十二 碼呢家 野呢 ，有兩 個可 能性， 一係 入，一 係唔入 •呢球 波一係 入 ... 一係龍 門救到 ... 一係出 界 ... 

Since tautologies are always true, they do not contain refutable implications. They predict nothing about the world and they are not a theory at all. However, a useful theory may start with some tautological statements.

Must be logically consistent • • • •

Some Logical Fallacies : Fallacy of confirming the consequent If A implies B, B does not imply A. If one argues that “If A implies B, B implies A”, one commits the fallacy of confirming the consequent.

Some Logical Fallacies : • Fallacy of denying the antecedent • If A implies B, NOT A does not imply NOT B. • If one argues that “If A implies B, NOT A implies NOT B”, one commits the fallacy of denying the antecedent.

Must have a certain degree of generalization power • A good theory should be one that embodies a few (test) conditions and allows us to generalize from one situation to many others. • An ad hoc theory is a theory that holds only under a particular set of conditions and thus lacks of generalization power.

Assumptions may be unrealistic • A good theory should be a simplification of the world • Simplifying assumptions are usually unrealistic • Test conditions have to be realistic • The usefulness of a theory is judged by its predictive power

In the scientific aspect of Economics, it is strictly positive.

Positive statements are statements with no ethical considerations or value judgment. That is, we are not interested in whether an act is right or wrong, good or bad, fair or not. Positive statements are those statements about which we can all agree. Disagreement over positive statements can be settled by appealing to facts.

Normative statements involve ethical considerations or value judgment. That is, to suggest what is right, what is wrong, what is good, what is bad, and so on. Normative statements cannot be settled by merely appealing to facts because people may have different value judgment.