What does mean Economic Laws? The Generalization or Law is the establishment of a general truth on the basis of particular observations or experiments which traces out a causal relationship between two or more phenomena. But economic laws are statements of general tendencies or uniformities in the relationships between two or more economic phenomena. So, what is the question we going to study; Economic Laws: Meaning, Definition, Features, Nature, and Limitations.

The Concept of Economic Laws: first study their Meaning, Definition, Features, Nature, and finally Limitations.

Meaning and definition of Economic Laws: Economic laws are nothing more than careful conclusions and inferences are drawn with the help of reasoning or by the aid of observation of human and physical nature. In everyday life, we see the man is always busy in satisfying his unlimited wants with limited means. In doing so, it acts upon certain principles.

Marshall defined economic laws in these words,

“Economic laws, or statements of economic tendencies, are those social laws, which relate to those branches of conduct in which the strength of the motives chiefly concerned can be measured by money price.”

On the other hand, according to Robbins,

“Economic laws are statements of uniformities about human behavior concerning the disposal of scarce means with alternative uses for the achievement of ends that are unlimited.”

These two definitions are common in that they consider economic laws as statements of tendencies or uniformities relating to human behavior.

Features of Economic Laws:

The following six points highlight the features of economic laws.

  • Are not Commands: Economic laws are not orders of the state (government) and do not command. They are formulated on the basis of people’s behavior in the real world.
  • Are not Exact: Since economic laws deal with actions of human beings having free will, they are not as exact as the laws of the natural sciences. They are statements which are true only in general. For example, the statement that men will buy goods at the cheapest available market is true generally but not universally. A man inten­tionally pays a higher price to help a relative or a friend, but such cases form a small fraction of the total transactions of human beings. Economists tacitly ignore these excep­tional cases and frame their laws on the expectation that men’s action will, in the great majority of cases, follow a uniform pattern. This makes economic laws generally true, but less exact than physical laws. “Economic laws are probability laws, not exact relationships.” “Abnormal as well as normal patterns of probabilities occur in economics”, as Samuelson has commented.
  • Statements of Cause and Effect: Economic laws, like scientific laws, are statements of cause and effect. They attempt to state the effects that will follow from particular causes. Unfortunately, in economic affairs, many factors operate simul­taneously and it is impossible to isolate each factor to find out its effects separately. The qualifying clause “other things remaining the same” (ceteris paribus), is used to get over this difficulty. But in economic life, other things generally do not remain the same. Hence, economic laws are never exact enough to enable accurate predictions or prophecies being made.
  • Hypothetical: Economic laws are hypothetical Economic laws are also hypothetical, i.e., they are conclusions drawn from certain assumptions or hypotheses. But in this, economic laws do not differ from other scientific laws. The laws of science also start from certain hypotheses and deduce certain consequences.
  • Predictions are Difficult: As regards making predictions the following example may be noted. The simple and exact laws of gravitation enable astronomers to make accurate forecasts. But in the case of tides, the level of water depends on so many factors (e.g., the strength of the attracting force, geo­graphical features of the country etc.) that it is impossible to forecast the level accurately. Marshall, therefore, says, “The laws of econo­mics are to be compared with the laws of tides rather than with the simple and exact laws of gravitation”.
  • There are Same Physical Laws: Some laws dealt with in books of economics deal with inanimate nature, e.g., the Law of Dimini­shing Returns. These laws are borrowed from other sciences.
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Nature of Economic Laws:

The following Nature of Economic Laws below are;

The nature of economic laws is that they are less exact as compared to the laws of natural sciences like Physics, Chemistry, Astronomy, etc. An economist cannot predict with surety as to what will happen in future in the economic domain. He can only say as to what is likely to happen in the near future. The reasons as to why economic laws are not as exact as that of natural sciences are as follows:

First, Natural sciences deal its matter which lifeless. While economics, we are concerned with the man who is endowed with a freedom of or he may act in whatever manner he likes. Nobody can predict with certainty his future actions. This element of uncertainty in human behavior results in making the laws of economics less exact than the laws of natural sciences.

Secondly, in economics, it is very difficult to collect factual data on which economic laws are to be based. Even if the data is collected it may change at any moment due to sudden changes in the tastes of the people or their attitudes.

Thirdly, there are many unknown factors which its affect the expected course of action and thus can easily falsify the economic predictions. Dr. Marshall has devoted one chapter in his famous book “Principles of Economies” in discussing the nature of economic laws. He writes, that laws of economics are to be compared with the laws of tides rather than with the simple and the exact law of gravitation.

The reason for comparing the laws of economics with the laws of tides by Marshall is that the laws of tides are also not exact. The rise of tides cannot be accurately predicted. It can only be said that the tide is expected to rise at a certain time. It may or may not rise. Strong wind may change its direction to the opposite side. They instead of rising may fall. So is the case with the laws of economics.

Scientific or like Natural or Physical Laws: 

Economic laws are like scientific laws which trace out a causal relationship between two or more phenomena. As in natural sciences, a definite result is expected to follow from a particular cause in economics. The law of gravitation states that things coming from above must fall to the ground at a specific rate, other things being equal. But when there is a storm, the gravitational force will be reduced and the law will not work properly.

As pointed out by Marshall, “The law of gravitation is, therefore, a statement of tendencies”. Similarly, economic laws are statements of tendencies. For instance, the law of demand states that other things remaining the same, a fall in price leads to an extension in demand and vice versa. Again, some economic laws are positive like scientific laws such as the Law of Diminishing Returns which deal with inanimate nature.

Since economic laws are like scientific laws, they are universally valid. According to Robbins, “Economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this sense, they are on the same footing as other scientific laws.”

Non-Precise like the Laws of Natural Sciences:

Despite these similarities, economic laws are not as precise and positive as the laws of natural sciences. This is because economic laws do not operate with as much certainty as for the scientific laws. For instance, the law of gravitation must operate whatever the conditions may be. Any object coming from above must fall to the ground. But demand will not increase with the fall in price if there is the depression in the economy because consumers lack purchasing power.

Therefore, according to Marshall, “There are no economic tendencies which act as steadily and can be measured as exactly as gravitation can, and consequently, there are no laws of economics which can be compared for precision with the law of gravitation.” There is controlled experimentation in the natural sciences and the natural scientist can test scientific laws very rapidly by altering natural conditions such as temperature and pressure in his experiments in the laboratory.

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But in economics, controlled experiments are not possible because an economic situation is never repeated exactly at another time. Moreover, the economist has to deal with the man who acts in accordance with his tastes, habits, idiosyncrasies, etc. The entire universe or that part of it in which he carries out his research is the economist’s laboratory. As a result, predictions concerning human behavior are liable to error.

For instance, a rise in price may not lead to a contraction in demand rather it may expand it if people fear the shortage of goods in anticipation of war. Even if demand contracts as a result of the price rise, it is not possible to predict accurately how much the demand will contract. Thus economic laws “do not necessarily apply in every individual case; they may not be reliable in the ever-changing environment of the real economy; and they are in no sense, of course, inviolable.”

Non-predictable like the Law of Tide:

But accurate predictions are not possible in economics alone. Even sciences like biology and meteorology cannot predict or forecast events correctly. The law of tide explains why the tide is strong at the full moon and weak at the moon’s first quarter. On this basis, it is possible to predict the exact hour when the tide will rise. But this may not happen. It may rise earlier or later than the predicted time due to some unforeseen circumstances.

Marshall, therefore, compared the laws of economics with the laws of tides “rather than with simple and exact law of gravitation. For the actions of men are so various and uncertain that the best statements of tendencies, which we can make in a science of human conduct, must need be inexact and faulty.”

Behaviorist:

Most economic laws are a behaviorist, such as the law of diminishing marginal utility, the law of Equimarginal utility, the law of demand, etc., which depend upon human behavior. But the behaviorist laws of economics are not as exact as the laws of natural sciences because they are based on human tendencies which are not uniform. This is because all men are not rational beings.

Moreover, they have to act under the existing social and legal institutions of the society in which they live. As rightly pointed out by Prof. Schumpeter: “Economic laws are much less stable than are the ‘laws’ of any physical science…and they work out differently in different institutional conditions”

Indicative:

Unlike scientific laws, economic laws are not assertive. Rather, they are indicative. For instance, the Law of Demand simply indicates that other things being equal, quantity demanded varies inversely with price. But it does not assert that demand must fall when price increases.

Hypothetical:

Prof. Seligman characterized economic laws as “essentially hypothetical”, because they assume ‘other things being equal’ and draw conclusions from certain hypotheses. In this sense, all scientific laws are also hypothetical as they too assume the ceteris paribus clause. For instance, other things being equal, a combination of hydrogen and oxygen in the proportion of 2:1 will form water. If, however, this proportion is varied or/and the required temperature and pressure are not maintained, water will not be formed.

Still, there is the difference in hypothetical element present in economic laws as against scientific laws. It is more pronounced in the former because economics deals with human behavior and natural sciences with the matter. But as compared with the laws of other social sciences, the laws of economics are less hypothetical but more exact, precise and accurate.

This is because economies possess the measuring rod of money which is not available to other social sciences like ethics, sociology, etc. which makes economics more pragmatic and exact. Despite this, economic laws are less certain like the laws of social sciences because the value of money does not always remain constant. Rather, it changes from time to time.

Truisms or Axioms:

There are certain generalizations in economics which may be stated a truism. They are like axioms and do not have any empirical content, such as ‘saving is a function of income,’ ‘human wants are numerous’, etc. Such statements are universally valid and need no proof. So they are superior to scientific laws. But all economic laws are not like axioms and hence not universally true and valid.

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Historico-Relative:

On the other hand, economists of the Historical School regarded economic laws as abstractions which are historical-relative, that is economic laws have only a limited application to a given time, place and environment.

They have limited validity to certain historical conditions and have no relevance to the analysis of social phenomena outside that. But Robbins does not agree with this view because according to him, economic laws are not historical-relative. They are simply relative to the existence of certain conditions which are assumed to be given. If the assumptions are consistent with one another and if the process of reasoning is logical, economic laws would be universally valid.

But these are big “ifs”. We, therefore, agree with Prof. Peterson that economic laws “are not detailed and photographically faithful reproductions of a portrait of the real world, but are rather simplified portraits whose purpose is to make the real world intelligible.”

Economic Laws Meaning Definition Features Nature and Limitations
Economic Laws: Meaning, Definition, Features, Nature, and Limitations. Image credit from #Pixabay.

Limitation of Economic Laws:

One major drawback of economic laws is they lack generality. For example, the laws developed to explain the nature and functioning of capitalist economies do not have any relevance for socialist countries. For example, Alfred Marshall developed the laws of demand and supply which apply in a free market in the absence of government intervention. Such laws do not apply in the erstwhile countries like the former Soviet Union where the price (market) system yielded place to the planning system.

In a planned economy, the market mechanism is replaced by government allocation or ra­tioning. So, the question of applying the laws of demand and supply does not arise. Thus, economic laws lack generality and are not universally applicable. Furthermore, some laws of economics which have been developed in the context of advanced industrial countries may not find application in devel­oping countries like India.

As V. K. R. V. Rao has pointed out, the multiplier principle, as enunciated by Keynes in the context of the advanced countries of the world, does not work in developing countries like India. This is attributable to the structure of such economies. Similarly, the Quantity Theory of Money has been developed in the context of industrially advanced countries. It seeks to establish an exact, proportional relationship between money and prices.

But, it cannot explain’ the present price situation in India. Here, inflation is not a purely monetary phenomenon as predicted by the Quantity Theory. These two examples make one thing clear at least — the laws and theories of economics devel­oped in the context of advanced countries cannot be applied in developing countries like India. In fact, there is a feeling among some group of economists that, people in developing countries like India behave and respond differently from those of advanced countries.

For example, greater self-consumption of farmers in India explain why the supply response of agricultural commodi­ties is not always favorable in the event of a rise in the price of agricultural products. It is often observed that, if the price of a particular commodity rises, farmers produce less of it so as to maintain the same level of income. Thus,’ they not only produce less at a higher price but generate less marketable surplus when the price rises. Thus, the marketable surplus of, say, wheat varies inversely with its price.

But, in developed countries, it is observed that, as usual, the supply curve of agricultural output slopes upward from left to right and marketable surplus increases when the price rises. All these examples make it abundantly clear that most of the laws and principles of economics which have been developed in the context of advanced countries cannot be applied in developing countries like India.

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