History of economic thoughtEconomics as a science

Petr Wawrosz

What is science

• Science is a method, a confidence and a faith.• It is a method of controlled and rechecked

observations and experiments, objectively recorded with absolute honesty.

• It is a confidence that truth is discoverable. • It is a faith that truth is worth discovering.

• „The whole of science is nothing more than the refinement of everyday thinking“ (A. Einstein).

Characteristic of science

• Science is generally understood as an endeavor to understand, explain and predict the world we live in using distinctive methods of enquiry in an attempt to construct theories.

• Science tries to find truth and uses systematic methods and ways that helps to achieve in the task.

• Purpose of science is to produce useful models of reality.

The term „science“• Science refers to:

- a system of acquiring knowledge. This system uses observation and experimentation to describe and explain natural phenomena.- to the organized body of knowledge people have gained using that system.

• Less formally, the word science often describes any systematic field of study or the knowledge gained from it.

Scientific methods

• Observation/Research • Hypothesis • Prediction • Experimentation • Conclusion

Scientific methods

• Observation/Research = understanding the chosen problem.

• Hypothesis = a proposed explanation for a phenomenon

• Prediction = proposition that can be deducted from hypothesis.

• Experiment = part of the scientific method that tests your hypothesis.

• Conclusion = summary of the experiment's results, and how those results match up to your hypothesis.

Scientific methods (shortly)

• Observation• Theory• More observation

Division of science

• Real science versus formal science

• Real: real word: physics, chemistry, biology, medicine, economics, sociology

• Formal: imaginary word (word creating by human mind): mathematics, logic, theoretical computer science

Division of science

• Social science versus natural science

• Social sciences are the study of humans and their interactions, and natural sciences are the study of the universe and how it works.

• Natural science are defined as sciences that are experimental and applied, whereas the social sciences are those that grew from moral philosophy.

Economics as a social science• Social science = any scholastic discipline or

scientific field that investigates human society. Social science investigations examine an individual’s relationship with and interaction in society.

• anthropology, • economics, • history, • political science, • psychology,• sociology,

• education, • geography, • law, • linguistics, • criminology ,• archaeology

See http://www.youtube.com/watch?v=DSIdaTSG2Gg

Problems of social science

• Problems with experiments due to complexity of any phenomena. Social experience is historical experience.

• Problems with measurement:e.g. Mises wrote: „If we determine that a rise of 10 per cent in the supply of potatoes in Atlantis in the years between 1920 and 1930 was followed by a fall in the price of potatoes by 8 per cent, we do not say anything about what happened or may happen with a change in the supply of potatoes in another country or at another time.“

Human action as a tool how to solve mentioned problems

• Human action is:- purposeful behavior (is based on a human plan)- the attempt to achieve some end.

• Values of the ends are subjective. If a person decides to prefer one end before others he/she declares that preferred end is for him/her more valuable than others.

• Human action:- needs resources (including time) and means- has its opportunity costs

Some characteristic of human action

• Man:- learns from previous experiences.- respond to the incentives (factors affecting his behavior)- compares marginal utility and marginal costs (including opportunity costs) of additional units of action- operates in uncertain world so he/she can make a mistakes

Action and uncertainty

• In a world where the future is known with exacting certainty, free action is not possible. If I know what is coming and there is no possibility of altering it, there is no point in attempting to do so.

Some other ways how to overcome the mentioned problems

• Natural experiment: if Canada has higher unemployment than the US although people in both countries are similar we can try to find the reason of the differences.

• Statistical investigation: help us reveal relationships among variables. See e.g. http://www.youtube.com/watch?v=zk6gOeggViw

• Economic experiment: usually in laboratory

Economic model

• The term has several meanings:• 1. synonym for the theory (model of the determination of

national income)• 2. represents subset of the theory (Keynesian model)• 3. means a specific quantitative formulation of the theory

(forecasting model used by central banks)• 4. means application of general theory in specific context.• 5. represents simplified description of reality, when we

concentrate on some facts and omits others. Thus it is based on unrealistic assumption.

Economic model as a simplified version of the reality

• Simplification: enable us to better explore the world and concentrate on its essence.

• From the simplified version is possible to go to the more difficult version. If we start wit the difficult one, we can loose the way („to drown in the sea of information“).

• Other science use same ways too (physic: assumption of no friction)

The example of the model:circular-flow diagram

The example of the model:circular-flow diagram

• The circular flow model describes the exchange of goods, services, and money between households and businesses.

• Goods and services are bought and sold in two markets, the market for the factors of production (where households sell their time to firms to create the goods and services) and the market for goods and services (where firms sell the goods and services to households).

• The circular flow diagram also illustrates the flow of money. Households spend money to buy the goods and services from the firms. In turn, the firms use the revenue from that transaction to buy the factors of production from the household, such as labor.

• The diagram also includes taxes, which are paid by both households and firms to the government and returned in the form of subsidies and transfer payments.

• See http://www.youtube.com/watch?v=YNfIlfua6L0.

Circular-flow diagram and HoET

• Richard Cantilion (1680 – 1734)• Francois Quesnay (1694 – 1774)• Jean Baptista Say (1767 – 1832)• Karl Marx (1818 – 1983)• Leon Walras (1834 – 1910)• Wassily Leontief (1905 – 1999)• Piero Sraffa (1989 – 1983)• Paul Samuelson (1915 – 2009)• Mark Skousen (1947)

Economic decisions

• Personal• Business• Government

• Give examples for each area!