Explain the Deductive and Inductive methods of Economic Analysis. Which one is more suitable in modern times?
Explain the Deductive and Inductive methods of Economic Analysis. Which one is more suitable in modern times?
Or
Explain the Deductive and Inductive methods of economic analysis. Which of the two is used more commonly these days and why?
Ans.
Methods of Economics
In Economics, there are two methods of deriving generalisations or laws or conducting economic analysis. These methods are:
1. Deductive Method
This method is also called abstract, analytical or priori method. Under this method, laws are deduced logically. The logic in this method proceeds from general to particular. This method is called ‘abstract’ or ‘priori’ method because it is based on abstract reasoning and not on actual facts. However, the actual situation may differ from what deductive logic suggests. For example, it is assumed that man is rational and on the basis of this it is inferred that he will buy cheap and sell dear. But, in actual situations this may not happen. A man can buy dear and sell cheap because of absence of proper knowledge or due to unfavourable market conditions.
The principal steps in the process of deriving economic generalisations through deductive logic are:
(a) Perception of the problem.
(b) Defining the technical terms and making appropriate assumptions.
(c) Deducing hypothesis.
(d) Testing of the hypothesis deduced.
Many theories and generalisations have been established in Economics with the help of this method, such as, inverse relationship between price and quantity demanded, direct relationship between price and quantity supplied etc.
But, this method suffers from certain handicaps, such as:
(a) Assumptions generally turn out to be untrue or partially true.
(b) Valid conclusions cannot be drawn in the absence of proper knowledge of the whole situation.
(c) It is dangerous to claim universal validity for the economic generalisations so deduced.
2. Inductive Method
Under this method conclusions are drawn on the basis of collection and analysis of facts relevant to the inquiry. The logic in this method, proceeds from the particular to the general. The generalisations are based on observation of individual examples.
The principal steps of this methods are :
(a) Perception of the problem.
(b) Collection, classification and analysis of data by using appropriate statistical techniques.
(c) Finding out the reasons for the relationship established through statistical analysis.
(d) Set rules for the verification of the principles.
Many researches in macro-economics have been obtained through inductive method, such as the nature of consumption function describing the relationship between income and consumption, etc.
This method is used because:
(a) Statistical induction leads to precise, exact and measurable conclusions.
(b) It underlines the relativity of economic laws.
(c) It shows that generalisations are valid only under certain conditions.
But this method suffers from certain limitations also, which are:
(a) Risk of hurried conclusions having being drawn from an insufficient observations.
(b) Difficulties involved in the collection of facts.
(c) The facts that observation and experimentation have very limited application in a science that deals with human activities.
The two methods are not mutually exclusive and are used side by side in any scientific inquiry. Conclusions drawn from deductive method of reasoning are verified by inductive method by observing facts of life. For example, the hypothesis of rationality may be tested and verified by the observation of behaviour of people.
As Marshall rightly pointed out, “Induction and deduction are both needed for scientific thought as the right and left foot are both needed for walking”.
