Learned, What is the Deductive Method of Economics? Steps, Merits, and Demerits!
The Deductive Method: Deduction Means reasoning or inference from the general to the particular or from the universal to the individual. The deductive method derives new conclusions from fundamental assumptions or from truth established by other methods. It involves the process of reasoning from certain laws or principles, which are assuming to be true, to the analysis of facts. Also learn, What are the Methods of Economics? What is the Deductive Method of Economics?
Then inferences are drawn which are verifying against observing facts. Bacon described deduction as a “descending process” in which we proceed from a general principle to its consequences. Mill characterized it as a priori method, while others called it abstract and analytical.
Deduction involves four steps:
(1) Selecting the problem.
(2) The formulation of assumptions on the basis of which the problem is to explore.
(3) The formulation of hypothesis through the process of logical reasoning whereby inferences are drawn.
(4) Verifying the hypothesis.
These steps are discussing as under, Following are:
(1) Selecting the problem:
The problem which an investigator selects for inquiry must state clearly. It may be very wide like poverty, unemployment, inflation, etc. or narrow relating to an industry. The narrower the problem the better it would be to conduct the inquiry.
(2) Formulating Assumptions:
The next step in deduction is the framing of assumptions which are the basis of hypothesis. To be fruitful for inquiry, the assumption must be general. In any economic inquiry, more than one set of assumptions should make in terms of which a hypothesis may formulate.
3) Formulating Hypothesis:
The next step is to formulate a hypothesis on the basis of logical reasoning whereby conclusions are drawn from the propositions. This is done in two ways: First, through logical deduction. If and because relationships (p) and (q) all exist, then this necessarily implies that relationship (r) exists as well. Mathematics is mostly using these methods of logical deduction.
(4) Testing and Verifying the Hypothesis:
The final step in the deductive method is to test and verify the hypothesis. For this purpose, economists now use statistical and econometric methods. Verification consists in confirming whether the hypothesis is in agreement with facts. A hypothesis is true or not can verify by observation and experiment. Since economics is the concern with human behavior, there are problems in making an observation and testing a hypothesis.
For example, the hypothesis that firms always attempt to maximize profits rests upon the observation that some firms do behave in this way. This premise is based on a priori knowledge which will continue to accept so long as conclusions deduced from it are consistent with the facts. So the hypothesis stands verified. If the hypothesis is not confirmed, it can argue that the hypothesis was correct but the results are contradictory due to special circumstances. Explain are Economics is a Science and Art?
Under these conditions, the hypothesis may turn out to the wrong. In economics, most hypotheses remain unverified because of the complexity of factors involving in human behavior which, in turn, depend upon social, political and economic factors. Moreover, controlled experiments in a laboratory are not possible in economics. So the majority of hypotheses remain untested and unverified in economics. Also learn, What are Fundamentals of Economics?
Merits of Deductive Method:
The deductive method has many advantages.
It is the method of “intellectual experiment,” according to Boulding. Since the actual world is very complicated, “what we do is to postulate in our own minds economic systems which are simpler than reality but more easy to grasp. We then work out the relationship in these simplified systems and by introducing more and more complete assumptions, finally, work up to the consideration of reality itself.” Thus, this method is nearer to reality.
The deductive method is simple because it is analytical. It involves abstraction and simplifies a complex problem by dividing it into component parts. Further, the hypothetical conditions are so chosen as to make the problem very simple, and then inferences are deducing from them.
It is a powerful method of analysis for deducing conclusions from certain facts. As pointed out by Cairnes, The method of deduction is incomparable, when conducted under proper checks, the most powerful instrument of discovery ever wielded by human intelligence.
The use of statistics, mathematics, and econometrics in deduction brings exactness and clarity in economic analysis. The mathematically trained economist is able to deduce inferences in a short time and make analogies with other generalizations and theories. Further, the use of the mathematical-deductive method helps in revealing inconsistencies in economic analysis.
The use of the deductive method is indispensable in sciences like economics where experimentation is not possible. As pointed out by Gide and Rist, “In a science like political economy, where an experiment is practically impossible, abstraction and analysis afford the only means of escape from those other influences which complicate the problem so much.”
The deductive method helps in drawing inferences which are of universal validity because they are based on general principles, such as the law of diminishing returns.
Demerits of Deductive Method:
Despite these merits, much criticism has been leveled against this method by the Historical School which flourished in Germany. Explain are What is Economics? Meaning and Definition of Criticisms!
1. Unrealistic Assumption:
Every hypothesis is based on a set of assumptions. When a hypothesis is testing, assumptions are indirectly testing by comparing their implications with facts. But when facts refute the theory based on the tested hypothesis, the assumptions are also indirectly refuted. So deduction depends upon the nature of assumptions. If they are unrealistic, in this method, economists use the ceteris paribus assumption. But other things seldom remain the same which tend to refute theories.
2. Not Universally Applicable:
Often the conclusions derived from deductive reasoning are not applied universally because the premises from which they are deducing may not hold good at all time and places. For instance, the classicists assumed in their reasoning that particular conditions prevailing in England of their times were valid universally. This supposition was wrong. Prof. Lerner, therefore, points out that the deductive method is simply “armchair analysis” which cannot regard as universal.
3. Incorrect Verification:
The verification of theories, generalizations or laws in economics is based on observation. And right observation depends upon data which must be correct and adequate. If a hypothesis is deducing from wrong or inadequate data, the theory will not correspond with facts and will refute. For instance, the generalizations of the classicists were based on inadequate data and their theories were refuted. As pointed out by Ircholson, “the great danger of the deductive method lies in the natural aversion to the labor of verification.”
4. Abstract Method:
The deductive method is highly abstract and requires great skill in drawing inferences for various premises. Due to the complexity of certain economic problems, it becomes difficult to apply this method even at the hands of an expert researcher. More so, when he uses mathematics or econometrics.
5. Static Method:
This method of analysis is based on the assumption that economic conditions remain constant. But economic conditions are continuously changing. Thus this is a static method which fails to make the correct analysis.
The chief defect of the deductive method “lies in the fact that those who follow this method may absorb in the framing of intellectual toys and the real world may forget in the intellectual gymnastics and mathematical treatment.”