A useful insight into the methodology applied in economics can be gained by distinguishing between positive and normative economics. This enables one to appreciate the limitations and scope of economics.
Positive economics is concerned with what is, or how the economic problem facing societies are actually solved. Positive statements therefore, only deal with facts for example; “Kenya is a member of the East African community” and “Uganda is currently Kenya‟s major trading partner” are positive statements. For example a dispute over whether Uganda is currently Kenya‟s major trading partner can be settled by looking at the statistics of Kenya‟s trade with its partners.
Normative economics refers to the part of economics that deals with the value of judgments. This implies that normative deals with what ought to be, or how the economic problems facing the society should be solved. Normative statements usually reflect
people’s moral attitudes and are expressions of what particular individuals group thinks ought to be done. A statement such as “Uganda to should join the Southern Africa Development Community” or “upper income classes ought to be taxed heavily”, are
Economics makes use of the scientific methods to develop theories. Scientific inquiry is generally confined to positive questions. One of the major objectives of sciences is to develop theories. A theory is a general or unifying principle that describes and explains
the relationship between things observed in the world around us. The purpose of a theory is to predict and explain. The search for a theory begins whenever a regular pattern is observed in the relationship between two or more variables and one asks why this should is so. A theory refers to a hypothesis that has been successfully tested. It is important to note that economics hypothesis is not tested by realism of its assumptions but its ability to predict accurately and explain.
The following procedures are adopted in the scientific method:
- The concepts are defined in such a way that they can be measured in order to be able to test the theory against the facts.
Whereas these facts may seem superfluous, in practice it is quite difficult to define many concepts in economics in a way that is agreeable to all schools of thought. It is often correctly postulated that when you want to argue, first define your terms.
- A hypothesis formulated A hypothesis refers to tentative untested statement, which attempts to explain how one thing is related to another. Hypotheses are based on observation and upon certain assumptions about how the real world works.
The assumptions may themselves be based upon prevailing theories that have proved to have a high degree of reliability. In a social science, the basic assumptions or paradigms about reality are vital. A discipline‟s basic assumptions about reality determine what it focuses on. In economics for example, many theories are based on the rationality assumption. The formulation hypothesis is thus arrived at through a process of logical reasoning using observed facts and certain assumptions. As mentioned earlier, a hypothesis is not tested by the realism of its assumptions but its ability to predict accurately. Economic hypothesis must be framed in a manner that enables scientists to test their validity.
- The hypothesis is then used to make predictions. If the hypothesis is correct, then if certain things are done, certain others will happen. For example hypothesis may predict the rise in the price of a given commodity may lead in the fall of the quantity demanded of that commodity.
- The hypothesis is tested by considering whether its predictions are supported by facts.
In order to test a hypothesis and arrive at a theory, one must go to the real world and see whether the hypothesis is indeed true for various situations. The social scientists however cannot carry out controlled experiments in the laboratory. The laboratory of the social
scientist in the human society and human beings cannot be put into a controlled situation to see what happens. Observed economic data is subjected to statistical analyses whose techniques help the economist to determine the probability that particular events have
certain causes. If a hypothesis is supported by factual evidence we have a successful theory, note that a theory can never be true in all circumstances and new theories are developed as old ones are discarded because their predictions have become unreliable.