Inductive and Deductive methods of Economics

The Deductive Method

Deduction Means reasoning or inference from the general to the particular or from the universal to the individual. The deductive method derives new conclusions from fundamental assumptions or from truth established by other methods. It involves the process of reasoning from certain laws or principles, which are assumed to be true, to the analysis of facts.

Then inferences are drawn which are verified against observed facts. Bacon described deduction as a “descending process” in which we proceed from a general principle to its consequences. Mill characterised it as a priori method, while others called it abstract and analytical.


(1) Selecting the problem:

The problem which an investigator selects for enquiry must be stated clearly. It may be very wide like poverty, unemployment, inflation, etc. or narrow relating to an industry. The narrower the problem the better it would be to conduct the enquiry.

(2) Formulating Assumptions:

The next step in deduction is the framing of assumptions which are the basis of hypothesis. To be fruitful for enquiry, the assumption must be general. In any economic enquiry, more than one set of assumptions should be made in terms of which a hypothesis may be formulated.

(3) Formulating Hypothesis:

The next step is to formulate a hypothesis on the basis of logical reasoning whereby conclusions are drawn from the propositions. This is done in two ways: First, through logical deduction. If and because relationships (p) and (q) all exist, then this necessarily implies that relationship (r) exists as well. Mathematics is mostly used in these methods of logical deduction.

(4) Testing and Verifying the Hypothesis:

The final step in the deductive method is to test and verify the hypothesis. For this purpose, economists now use statistical and econometric methods. Verification consists in confirming whether the hypothesis is in agreement with facts. A hypothesis is true or not can be verified by observation and experiment. Since economics is concerned with human behaviour, there are problems in making observation and testing a hypothesis.

For example, the hypothesis that firms always attempt to maximise profits, rests upon the observation that some firms do behave in this way. This premise is based on a priori knowledge which will continue to be accepted so long as conclusions deduced from it are consistent with the facts. So the hypothesis stands verified. If the hypothesis is not confirmed, it can be argued that the hypothesis was correct but the results are contradictory due to special circumstances.

Under these conditions, the hypothesis may turn out to the wrong. In economics, most hypotheses remain unverified because of the complexity of factors involved in human behaviour which, in turn, depend upon social, political and economic factors. Moreover, controlled experiments in a laboratory are not possible in economics. So the majority of hypotheses remain untested and unverified in economics.

Merits of Deductive Method

(1) Real

It is the method of “intellectual experiment,” according to Boulding. Since the actual world is very complicated, “what we do is to postulate in our own minds economic systems which are simpler than reality but more easy to grasp. We then work out the relationship in these simplified systems and by introducing more and more complete assumptions, finally work up to the consideration of reality itself.” Thus, this method is nearer to reality.

(2) Simple

The deductive method is simple because it is analytical. It involves abstraction and simplifies a complex problem by dividing it into component parts. Further, the hypothetical conditions are so chosen as to make the problem very simple, and then inferences are deduced from them.

(3) Powerful

It is a powerful method of analysis for deducing conclusions from certain facts. As pointed out by Cairnes, The method of deduction is incomparably, when conducted under proper checks, the most powerful instrument of discovery ever wielded by human intelligence.

(4) Exact

The use of statistics, mathematics and econometrics in deduction brings exactness and clarity in economic analysis. The mathematically trained economist is able to deduce inferences in a short time and make analogies with other generalisations and theories. Further, the use of the mathematical-deductive method helps in revealing inconsistencies in economic analysis.

(5) Indispensable

The use of deductive method is indispensable in sciences like economics where experimentation is not possible. As pointed out by Gide and Rist, “In a science like political economy, where experiment is practically impossible, abstraction and analysis afford the only means of escape from those other influences which complicate the problem so much.”

(6) Universal

The deductive method helps in drawing inferences which are of universal validity because they are based on general principles, such as the law of diminishing returns.

Demerits of Deductive Method

1 .Unrealistic Assumption

Every hypothesis is based on a set of assumptions. When a hypothesis is tested, assumptions are indirectly tested by comparing their implications with facts. But when facts refute the theory based on the tested hypothesis, the assumptions are also indirectly refuted. So deduction depends upon the nature of assumptions. If they are unrealistic, in this method, economists use the ceteris paribus assumption. But other things seldom remain the same which tend to refute theories.

2. Not Universally Applicable

Often the conclusions derived from deductive reasoning are not applicable universally because the premises from which they are deduced may not hold good at all time and places. For instance, the classicists assumed in their reasoning that particular conditions prevailing in England of their times were valid universally. This supposition was wrong. Prof. Lerner, therefore, points out that the deductive method is simply “armchair analysis” which cannot be regarded as universal.

3. Incorrect Verification

The verification of theories, generalisations or laws in economics is based on observation. And right observation depends upon data which must be correct and adequate. If a hypothesis is deduced from wrong or inadequate data, the theory will not correspond with facts and will be refuted. For instance, the generalisations of the classicists were based on inadequate data and their theories were refuted. As pointed out by ircholson, “the great danger of the deductive method lies in the natural aversion to the labour of verification.”

4. Abstract Method

The deductive method is highly abstract and requires great skill in drawing inferences for various premises. Due to the complexity of certain economic problems, it becomes difficult to apply this method even at the hands of an expert researcher. More so, when he uses mathematics or econometrics.

5. Static Method

This method of analysis is based on the assumption that economic conditions remain constant. But economic conditions are continuously changing. Thus this is a static method which fails to make correct analysis.

6. Intellectually

The chief defect of the deductive method “lies in the fact that those who follow this method may be absorbed in the framing of intellectual toys and the real world may be forgotten in the intellectual gymnastics and mathematical treatment.”

Inductive Method

Induction “is the process of reasoning from a part to the whole, from particulars to generals or from the individual to the universal.” Bacon described it as “an ascending process” in which facts are collected, arranged and then general conclusions are drawn.

The inductive method was employed in economics by the German Historical School which sought to develop economics wholly from historical research. The historical or inductive method expects the economist to be primarily an economic historian who should first collect material, draw gereralisations, and verify the conclusions by applying them to subsequent events. For this, it uses statistical methods. The Engel’s Law of Family Expenditure and the Malthusian Theory of Population have been derived from inductive reasoning.

The inductive method involves the following steps:

  1. The Problem

In order to arrive at a generalisation concerning an economic phenomenon, the problem should be properly selected and clearly stated.

  1. Data

The second step is the collection, enumeration, classification and analysis of data by using appropriate statistical techniques.

  1. Observation

Data are used to make observation about particular facts concerning the problem.

  1. Generalisation

On the basis of observation, generalisation is logically derived which establishes a general truth from particular facts.

Thus induction is the process in which we arrive at a generalisation on the basis of particular observed facts.

The best example of inductive reasoning in economics is the formulation of the generalisation of diminishing returns. When a Scottish farmer found that in the cultivation of his field an increase in the amount of labour and capital spent on it was bringing in less than proportionate returns year after year, an economist observed such instances in the case of a number of other farms, and then he arrived at the generalisation that is known as the Law of Diminishing Returns.

Merits of Inductive Method

(1) Realistic

The inductive method is realistic because it is based on facts and explains them as they actually are. It is concrete and synthetic because it deals with the subject as a whole and does not divide it into component parts artificially

(2) Future Enquiries

Induction helps in future enquiries. By discovering and providing general principles, induction helps future investigations. Once a generalisation is established, it becomes the starting point of future enquiries.

(3) Statistical Method

The inductive method makes use of the statistical method. This has made significant improvements in the application of induction for analysing economic problems of wide range. In particular, the collection of data by governmental and private agencies or macro variables, like national income, general prices, consumption, saving, total employment, etc., has increased the value of this method and helped governments to formulate economic policies pertaining to the removal of poverty, inequalities, underdevelopment, etc.

(4) Dynamic

The inductive method is dynamic. In this, changing economic phenomena can be analysed on the basis of experiences, conclusions can be drawn, and appropriate remedial measures can be taken. Thus, induction suggests new problems to pure theory for their solution from time to time.

(5) Histrico-Relative

A generalisation drawn under the inductive method is often histrico-relative in economics. Since it is drawn from a particular historical situation, it cannot be applied to all situations unless they are exactly similar. For instance, India and America differ in their factor endowments. Therefore, it would be wrong to apply the industrial policy which was followed in America in the late nineteenth century to present day India. Thus, the inductive method has the merit of applying generalisations only to related situations or phenomena.

Demerits of Inductive Method

(1) Misenterpretation of Data

Induction relies on statistical numbers for analysis that “can be misused and misinterpreted when the assumptions which are required for their use are forgotten.”

(2) Uncertain Conclusions

Boulding points out that “statistical information can only give us propositions whose truth is more or less probable it can never give us certainty.”

(3) Lacks Concreteness

Definitions, sources and methods used in statistical analysis differ from investigator to investigator even for the same problem, as for instance in the case of national income accounts. Thus, statistical techniques lack concreteness.

(4) Costly Method

The inductive method is not only time-consuming but also costly. It involves detailed and painstaking processes of collection, classification, analyses and interpretation of data on the part of trained and expert investigators and analysts

(5) Difficult to Prove Hypothesis

Again the use of statistics in induction cannot prove a hypothesis. It can only show that the hypothesis is not inconsistent with the known facts. In reality, collection of data is not illuminating unless it is related to a hypothesis.

(6) Controlled Experimentation not Possible in Economics

Besides the statistical method, the other method used in induction is of controlled experimentation. This method is extremely useful in natural and physical sciences which deal with matter. But unlike the natural sciences, there is little scope for experimentation in economics because economics deals with human behaviour which differs from person to person and from place to place.

Further, economic phenomena are very complex as they relate to man who does not act rationally. Some of his actions are also bound by the legal and social institutions of the society in which he lives. Thus, the scope for controlled experiments in inductive economics is very little. As pointed Out by Friendman, “The absence of controlled experiments in economics renders the weeding out of unsuccessful hypo-these slow and difficult.”

Economic Models

An economic model is a simplification of reality which abstracts from the complexities of the real world in order to explain economic phenomena and to make predictions.

Models can be expressed in various ways. The most obvious is to use words; most of the economic models are verbal models. They can also be expressed diagrammatically. Any model is a considerable simplification of reality.

Testing Models

In order to use models we usually have to be able to quantify the variables involved. In principle this may seem an easy task, is practice it is quite difficult.

Evaluating Theories

Theories can never be proved correct because it is not possible to check a theory against every possible observation.

From this viewpoint, a good theory is one that makes wide ranging claims which can be tested, while leaving itself open to falsi­fication.

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