The Economist as Scientist

Economists by their expert opinion on future of economy either related to a commodity, currency, financial product or industrial product provide the necessary guidelines to the industry and business usually on global basis. That is why we have considered this article under financial management outlining the background how economists work on their subjects and provide the forecasts. Economists try to address their subject with a scientist’s objectivity. They approach the study of the economy in much the same way as a physicist approaches the study of matter and a biologist approaches the study of life: They devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories.

To beginners, it can seem odd to claim that economics is a science. After all, economists do not work with test tubes or telescopes. The essence of science, however, is the scientific method – the dispassionate development and testing of theories about how the world works. This method of inquiry is as applicable to studying a nation’s economy as it is to studying the earth’s gravity or a species’ evolution. As Albert Einstein once put it, the whole of science is nothing more than the refinement of everyday thinking.

Although Einstein’s comment is as true for social sciences such as economics as it for natural sciences such as physics, most people are not accustomed to looking at society through the eyes of a scientist. Let’s discuss some of the ways in which economists apply the logic of science to examine how an economy works.

Isaac Newton, the famous 17th century scientist and mathematician, allegedly became intrigued one day when he saw an apple fall from a tree. This observation motivated Newton to develop a theory of gravity that applies not only to an apple falling to the earth but to any two objects in the Universe. Subsequent testing of Newton’ theory has shown that it works well in many circumstances (although, as Einstein would later emphasize, not all circumstances). Because Newton’s theory has been so successful at explaining observation, it is still taught in undergraduate physics courses around the world.

The interplay between theory and observation also occurs in the field of economics. An economist might live in a country experiencing rapid increase in prices and be moved by this observation to develop a theory of inflation. The theory might assert that high inflation arises when the government prints too much money. To test this theory the economist could collect and analyze data on prices and money from many different countries. If growth in the quantity of money were not at all related to the rate at which prices are rising, the economist would start to doubt the validity of this theory of inflation. If money growth and inflation were strongly correlated in international data, as in fact they are, the economist would become more confident in the theory.

Although economists use theory and observation like other scientists, they do face obstacles that make their task especially challenging: Experiments are often difficult in economics. Physicists studying gravity can drop many objects in their laboratories to generate data to test their theories. By contrast, economists studying inflation are not allowed to manipulate a nation’s monetary policy simply to generate useful data. Economists, like astronomers and evolutionary biologists, usually have to make do with whatever data the world happens to give them.

To find a substitute for laboratory experiments, economists pay close attention to the natural experiments offered by history. When a war in the Middle East interrupt the flow of crude oil, for instance Oil prices skyrocket around the world. For consumers of oil and oil products such and event depresses living standards. For economic policymakers, it poses a difficult choice about how best to respond. But for economic scientists, the event provides an opportunity to study the effects of a key natural resource on the world’s economies, and this opportunity persists long after the wartime increase in oil prices is over. These episodes are valuable to study because they give us insight into the economy of the past, and more important, because they allow us to illustrate and evaluate economic theories of the present.