Question

What are methods of economic studies? What is deductive method? What is inductive method? 

Answer 1

The two methods of economic studies are known as deductive method and inductive method. In fact these two methods are used not only in Economics but in other subjects also. Now let us see the difference in the two methods.

Deductive Method

This is the old, traditional method of studying Economics and all classical and neoclassical economists like Adam Smith, Ricardo, J. S. Mill, Marshall had conducted their studies and developed various theories of economics by this method.

Under this method, we conduct a study from general to particular. we start with an obvious fact or an axiom and proceed to analyse it under different conditions. In this process we do not use any tool and laboratory or statistical data but proceed on the basis of logic and reasoning. For example let's take the law of demand. It is an obvious fact that demand decreases by an increase in price and vice versa. This will be our axiom. Now we proceed to analyse it under different conditions like the increase in the income of consumer, changes in prices of related goods, changes in tastes and fashions and try to examine the applicability of this fact under these conditions. Thus we will be able to get the complete picture.

This method can be both mathematical and non mathematical and we use both of them in Economics. However most of the economists have been mostly using non mathematical deduction for the sake of simplicity. In recent years, as has already been pointed out there is increasing use of mathematical method of studying Economics.

The main advantage of this method is that without spending a lot of time and money we can use this method because it is basically an intellectual exercise. However it is essential that the analyst should be aware, should have a sharp mind and only then correct conclusions can be drawn.

The main disadvantage of this method is that any error in assumptions or a fact at the preliminary stage results in cumulative error and this can make our complete analysis misdirected and faulty. Another limitation is that since it is only a mental or intellectual exercise, it is many a times not easy to verify whether the conclusions are relastic or not.

Inductive Method

Inductive Method is also an important method of economic studies and it use is increasing in modern times. As the availability of statistical data increases, there is scope and opportunity to use this method. Under this method, the direction of our study is from particular to general. It means that  we study the fact under different conditions and circumstances and on the basis of these specific observations we arrive at a general rule. We collect data from different situations and by analysis of these data derive general conclusions. For example let's take that law of demand. For an inductive analysis of this law, we collect data on quantity demanded at different prices from different markets. From this varied data, we arrived at the common rule that there is an inverse relationship between price and quantity demanded. Thus we move from particular to general.

The inductive method is of two types- experimental and statistical.

In experimental method a given fact or relationship is repeated several times and common conclusions are derived accordingly. In physical and biological Sciences there is extensive use of this methodology but in Economics as has already been pointed out in we do not have a laboratory facility. Hence the use of this method is very rare. Only in the emerging branch of experimental economics, this method can be used hence in Economics we mostly used.

Hence in Economics be mostly used in statistical type of inductive analysis. Although we do not have a laboratory but we have large availability of statistical data. Correct analysis of these data can bring out many new facts. In using statistical data the following steps are followed-

~ Collection of data.

~ Classification and editing of data.

~ Analysis of data and

~ Deriving the conclusions.

Inductive method has several advantages. Firstly, since it is based on facts it is more factual and not imaginary and its conclusions are more relastic. Secondly the use of advanced statistical methods brings out many such facts which cannot be found by a intellectual exercise. In the modern computer era, this method is most useful because with the help of a computer many complicated data can be easily analysed.

Conclusion

In this way we find that both methods have their own advantages and disadvantages. Deductive method has a risk of becoming unrealistic and Inductive method has the risk of wrong interpretation. Analysis of data may bring out correct  facts but unless they are correctly interpreted, truth does not come out.

Hence, we can see that both these methods are not complete in themselves. Actually only a combined use of both of them can lead to correct study. What is essential is that we must make a correct hypothesis on the basis of some correctly observed facts. Then through a deductive reasoning this hypothesis be examined in different situations and then a theory may be developed.

In conclusion it can be said that both the methods are complementary to each other. Schmollor's statement is the most apt description of their complementarity. He said,  "Induction and Deduction are both needed for scientific thought as the left and right feet are both in needed for walking". 

The two method of economic studies are known as Deductive Method and Inductive Method.