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3 Economic language and reasoning
Economics relies on rigorous styles of argument more than other social sciences. This is at least the purported ideal of professionals in the field. Economic methodology has several interacting parts;
- Collection of economic data. These data consist of measurable values of price, and changes in price, for measurable commodities. For example the cost to hire a worker for a week, or the cost of a particular commodity, and how much is typically used.
- Formulation of models of economic relationships, for example, the relationship between the general level of prices and the general level of employment. This includes observable forms of economic activity: money, consumption, preferences, buying, selling, prices etc. Some of the models are simple accounting models, while others postulate specific kinds of economic behavior, such as utility or profit maximization. An example of a model which illustrates both of these aspects, is the classical mathematical formulation of the Keynesian system involving the consumption function and the national income identity. In this article we will refer to such models as formal models although they are not formal in the sense of formal logic.
- Production of Economic statistics. Taking the data collected, and applying the model being used to produce a representation of economic activity. For example the "general price level" is a theoretical idea common to macroeconomic models. The specific inflation rate involves taking measurable prices, and a model of how people consume, and calculating what the "general price level" is from the data within the model. For example suppose that gasoline costs 1 euro a litre: to calculate the price level would require a model of how much gasoline an average person uses, and what fraction of its income is devoted to this —but it also requires having a model of how people use gasoline, and what other goods they might substitute for it.
- Reasoning within economic models. This process of reasoning (see the articles on informal logic, logical argument, fallacy) may or may not involve advanced mathematics. For instance, an established (though possibly unexamined) tradition among economists is to reason about economic variables in two-dimensional graphs in which curves representing relations between the axis variables are parametrized by various indices. A good example of this type of reasoning is exhibited by Paul Krugman's online essay, There's something about macro. See also the article IS/LM model. One critical analysis of economic reasoning is studied in Paul Samuelson's thesis, Foundations of Economic Analysis: he identifies a class of assertions called operationally meaningful theorems which are those that can be meaningfully formulated within an economic model. As usual in science, the conclusions obtained by reasoning have a predictive as well as confirmative (or dismissive) value. An example of the predictive value of economic theory is a prediction as to the effect of current deficits on interest rates 10 years into the future. An example of the confirmative value of economic theory would be confirmation (or dismissal) of theories concerning the relation between marginal tax rates and the deficit.
Formal modelling is motivated by general principles of consistency and completeness.
Formal modelling has been adopted to some extent by all branches of economics. It is not identical to what is often referred to as mathematical economics; this includes, but is not limited to, an attempt to set microeconomics, in particular general equilibrium on solid mathematical foundations. Some reject mathematical economics: the Austrian School of economics believes that anything beyond simple logic is often unnecessary and inappropriate for economic analysis. In fact, the entire empirical-deductive framework sketched in this section may be rejected outright by this school. However, we believe the framework sketched here represents accurately the current predominant view of economics.
4 Development of economic thought
Main article: History of economic thought.
The term economics was coined around 1870 and popularized by influential "neoclassical" economists such as Alfred Marshall, as a substitute for the earlier term political economy, which referred to "the economy of polities" – competing states. The term political economy has been used through the 18-19th centuries, with Adam Smith, David Ricardo and Karl Marx as its main thinkers and which today is frequently referred to as the "classical" economic theory. Both economy and economics are derived from the Greek oikos- for "house" or "settlement", and nomos for "laws" or "norms".
Economic thought may be roughly divided into three phases: Premodern ( Greek, Roman, Arab), Early modern ( mercantilist, physiocrats) and Modern (since Adam Smith in the late 18th century). Systematic economic theory has been developed mainly since the birth of the modern era.
