History of economic thought
Economics 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
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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.
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anthropology,
economics,
history,
political science,
psychology,
sociology,
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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
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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!