MacroeconomicsI_working_version (1)

6
Chapter 1
Policy economics
Theoretical economics
Theories
Induction
Deduction
Facts
Figure 1.2 The relationship between facts, principles, and policies in economics 2 . In analysing problem
or aspects of the economy, economists may use the inductive method, through which they gather,
systematically arrange, and generalise from facts. Alternatively, they may use the deductive method, in which
they develop hypotheses, which are then tested against facts. Generalisations derived from either method are
useful not only in explaining economic behaviour but also as a basis for formulating economic policies.
Deduction is usually the way how economists create generalisations. They come up with a
tentative untested principle called hypothesis, which results from the process of drawing on
casual insight, observations, logic or intuition. To test the hypothesis, economists must
subject it to systematic and repeated comparison with relevant facts. This testing process,
sometimes called empirical economics, is suggested by the right, downward arrow from
“theories” to “facts” in Figure 1.2.
Induction starts with facts to theory, from the particular to the general. This approach
describes the process, in which an accumulation of facts is arranged systematically and
analysed to derive the underlying principle. The inductive method is depicted by the left,
upward arrow from “facts” to “theories” in the figure.
2 See McConnel-Brue [10]