Economics

Economics is an attempt to understand the processes that govern the production, distribution and consumption of wealth. Its ability to do so is limited by two important characteristics of those processes:

• their complexity and variety are often too great to permit anything approaching a comprehensive description;
• they are governed by the behaviour of differently-informed individuals with different motives.

Economics uses the methods of the physical sciences, adapted to those characteristics. It is classified as a science on the grounds that it aims to produce testable propositions.

The methodology of economics

Complex economic processes are analysed by mentally replacing them with simplified representations (referred to as a models). The assumptions embodied in those models determine how well their behaviour mirrors the process they are intended to represent. It is sometimes possible to adopt self-evident propositions (or axioms), and proceed successfully by deduction from those axioms. When axioms are not available - as is often the case - an inductive procedure has to be used. One possibility is to use assumptions that have been tested against observed data. Another is to use untested assumptions, and replace them if the model’s behaviour fails to mirror reality.

Among the assumptions embodied in an economic model are assumptions about human behaviour. It is commonly assumed that everyone is equally well-informed and everyone acts rationally. As a generalisation, that is obviously untrue, but its adoption does not necessarily make a model unrealistic. The model may behave “as if” it were true. The difficulty of making an acceptable assumption about human behaviour may nevertheless limit what can be achieved. Economists of the Austrian School are sceptical about the possibility of overcoming that difficulty and tend to reject the model- building procedure, but the mainstream of economic theory operates on the assumption that that difficulty is not decisive.