Economics – A Science and an Art:

Economics is a science: Science is a systematized body of knowledge that traces the relationship between cause and effect. Another attribute of science is that its phenomena should be amenable to measurement. Applying these characteristics, we find that economics is a branch of knowledge where the various facts relevant to it have been systematically collected, classified, and analyzed. Economics investigates the possibility of deducing generalizations as regards the economic motives of human beings. The motives of individuals and business firms can be very easily measured in terms of money. Thus, economics is a science.

Economics – A Social Science: To understand the social aspect of economics, we should bear in mind that laborers are working on materials drawn from all over the world and producing commodities to be sold all over the world to exchange goods from all parts of the world to satisfy their wants. There is, thus, a close interdependence of millions of people living in distant lands unknown to one another. In this way, the process of satisfying wants is not only an individual process but also a social process. In economics, one has, thus, to study social behavior i.e., the behavior of men in groups.

Economics is also an art: Art is a system of rules for the attainment of a given end. Science teaches us to know; art teaches us to do. Applying this definition, we find that economics offers us practical guidance in the solution of economic problems. Science and art are complementary to each other and economics is both a science and an art.

Positive and Normative Economics:

Positive science: It only describes what it is and normative science prescribes what it ought to be. Positive science does not indicate what is good or what is bad to society. It will simply provide results of the economic analysis of a problem.

Normative science: It makes a distinction between good and bad. It prescribes what should be done to promote human welfare. A positive statement is based on facts. A normative statement involves ethical values. For example, “12 percent of the labor force in India was unemployed last year” is a positive statement, which could be verified by scientific measurement. “Twelve percent unemployment is too high” is a normative statement comparing the fact of 12 percent unemployment with a standard of what is unreasonable. It also suggests how it can be rectified. Therefore, economics is a positive as well as a normative science.

Methodology of Economics:

Economics as a science adopts two methods for the discovery of its laws and principles, viz., (a) deductive method, and (b) inductive method.

a) Deductive method: Here, we descend from the general to particular, i.e., we start from certain principles that are self-evident or based on strict observations. Then, we carry them down as a process of pure reasoning to the consequences that they implicitly contain. For instance, traders earn profit in their businesses is a general statement that is accepted even without verifying it with the traders. The deductive method is useful in analyzing complex economic phenomena where cause and effect are inextricably mixed up. However, the deductive method is useful only if certain assumptions are valid. (Traders earn a profit, if the demand for the commodity is more).

b) Inductive method: This method mounts up from particular to general, i.e., we begin with the observation of particular facts and then proceed with the help of reasoning founded on experience to formulate laws and theorems on the basis of observed facts. E.g. Data on the consumption of poor, middle, and rich income groups of people are collected, classified, and analyzed, and important conclusions are drawn out from the results.

In the deductive method, we start from certain principles that are either indisputable or based on strict observations and draw inferences about individual cases. In the inductive method, a particular case is examined to establish a general or universal fact. Both deductive and inductive methods are useful in economic analysis.

Subject Matter of Economics

Economics can be studied through the traditional approach and modern approaches.

Traditional Approach: Economics is studied under five major divisions namely consumption, production, exchange, distribution, and public finance.

Consumption: The satisfaction of human wants through the use of goods and services is called consumption.

Production: Goods that satisfy human wants are viewed as “bundles of utility”. Hence production would mean the creation of utility or producing (or creating) things to satisfy human wants. For production, resources like land, labor, capital, and organization are needed.

Exchange: Goods are produced not only for self-consumption but also for sales. They are sold to buyers in markets. The process of buying and selling constitutes an exchange.

Distribution: The production of any agricultural commodity requires four factors, viz., land, labor, capital, and organization. These four factors of production are to be rewarded for their services rendered in the process of production. The landowner gets rent, the laborer earns a wage, the capitalist is given interest, and the entrepreneur is rewarded with profit. The process of determining rent, wage, interest, and profit is called distribution.

Public finance: It studies how the government gets money and how it spends it. Thus, in public finance, we study public revenue and public expenditure.

Modern Approach

I) Microeconomics analyses the economic behavior of any particular decision-making unit such as a household or a firm. Microeconomics studies the flow of economic resources or factors of production from households or resource owners to business firms and the flow of goods and services from business firms to households. It studies the behavior of individual decision-making units concerning fixation of price and output and its reactions to the changes in demand and supply conditions. Hence, microeconomics is also called price theory.

II) Macroeconomics studies the behavior of the economic system as a whole or all the decision-making units put together. Macroeconomics deals with the behavior of aggregates like total employment, gross national product (GNP), national income, general price level, etc. So, macroeconomics is also known as income theory.