The Concise Guide To Economics
by Jim Cox
The proper methodology--the system of principles, procedures and practices applied to a branch of knowledge--in the social sciences is to begin with self-evident axioms regarding the subject to be studied. (Self-evident meaning a proposition must be true since to deny that proposition one must employ that very proposition itself in the denial, e.g. the axiom of human action cannot be denied with out carrying out the action of the denial!)
Economics studies the actions of human beings transforming nature-given scarce resources into usable products. The axioms are therefore that human beings act to pursue ends (or goals) in the face of scarce resources. Therefore by logical deduction, one can begin with the undeniable axioms of purposeful human action and scarcity and proceed. The procession runs from human action and scarcity to choice; realizing from choice the truth of opportunity costs and continuing in like fashion to the entire field of knowledge embodying "economics." By this method, economic truths are ascertained as long as there is no break in the chain of logical deductive reasoning. This method is appropriate for the social sciences because in studying human behavior we can understand the motive driving human beings.
Notice that this method is inappropriate for the natural sciences which deal with inanimate objects--inanimate objects pursue no ends. In the natural sciences one does not deduce from axioms the next truth, but must ascertain truth by empirical studies.
The common mistaken methodological approach is "positivism" or "empiricism"--defined as gathering and studying facts. This approach is appropriate for inanimate objects and conscious-less living matter and is often imitated by economists in an attempt to gain a similar prestige of "serious science" as is held by the hard sciences--physics, astronomy, etc.
Among those championing the free market are the economists of the Chicago School; but the Chicago School approach in particular is sometimes known as the "open the horse's mouth and count teeth" method (the empirical approach). While this is quite appropriate for counting teeth it does not lend itself to the study of goal-directed human action.
An example: Let's say we want to know if the law of demand (more will be bought at a lower price and vice versa) is true or false. The empiricist will watch actual sales figures to test the law of demand. But of course a lot of factors other than price influence the quantity demanded. If the study results in a greater quantity demanded at a higher price do we discard the law of demand as false or do we know from logical deduction that it must be true and therefore other factors overwhelmed the influence of the higher price? As stated by Murray N. Rothbard in Man, Economy, and State:
... in human action, as contrasted with the natural sciences, ideas can be refuted only by other ideas; events themselves are complex resultants which need to be interpreted by correct ideas. p. 840
There is no way to carefully control for all variables in such a study of human behavior, and even when done "thoroughly" one never knows what one does not know--a relevant factor may have been overlooked. Notice further, that the empiricists must have some logic-based theory to go out and test in the first place--one cannot be a pure empiricist gathering every conceivable fact and statistic waiting for a theory to reveal itself. Quoting Rothbard in Individualism and the Philosophy of the Social Sciences:
The [mental experiment] is the economist's substitute for the natural scientist's controlled laboratory experiment. Since the relevant variables of the social world cannot actually be held constant, the economist holds them constant in his imagination. Using the tool of verbal logic, he mentally investigates the causal influence of one variable on another. p. 38
Deduction from axioms was a common method having been enunciated by John Baptiste Say (Say's Law), Nassau Senior (capital and value theory), John E. Cairnes (the last of the classical economists), Carl Menger (marginal utility analysis), and other major economists over the past 200 years. This method has been neglected only in the last several decades with the rush to positivism.
A second aspect of methodology is the individualist perspective. Since it is individuals who act in pursuit of goals, the proper method is to study individual human behavior. This methodological individualism does not preclude group actions; it just reminds us that ultimately the group is composed of individual human beings acting. (The standard definition of economics given is the allocation of scarce resources for use in the satisfaction ofsociety's unlimited wants. Notice the collectivist approach in this definition in contrast to the method described here.)