Question

2000 word essay. In what way does economic theory have real-world consequences? Using contemporary examples, show how assumption-making in theory (realistic or otherwise) is shaping government policies, business practices and human behaviour.

Answer 1

Economists see the world through a different lens than anthropologists,biologists,classicists,or practitioners of any other discipline. They analyse issues and problems with economic theories that are based on particular assumptions about human behaviour, that are different than the assumption an anthropologist or psychologist might use. A theory is a simplified representation of how two or more variables interact with each other. The purpose of a theory is to take a complex ,real-world issue and simplify it down to its essentials. If done well, this enables the analyst to understand the issue and any problems around it. A good theory is simple enough to be understood,while complex enough to capture the key features of the object or situation being studied. Economists carry a set of theories in their heads like a carpenter carries around a toolkit. When they see an economic issue or problem, they go through the theories they know to see if they can find one that fits. Then they use the theory to derive insights about the issue or problem. In economics, theories are expressed as diagrams,graphs or even as mathematical equation. Economists do not figure out the answer to the problem first and then draw the graph to illustrate. Rather, they use the graph of the theory to help them figure out the answer.