Lesson 2 

Economics is a distinct theoretical subject. However a focus on what is seen as the economic aspects of various other recognised disciplines or fields of study has produced a number of linked subjects, such as economic history, economic geography, economic anthropology and so forth. This has opened up and expanded the range of activities and involvement available to those trained in economics. Note that this is not the same as the view that all purposive human action is capable of economic analysis and consideration in order to determine its likely consequences, thus rendering economics into a subject of universal application. 

Much of modern-day economics utilises mathematics. Various aspects of mathematics such as statistical method are extensively employed in economics. This is particularly so in Macroeconomics, where much use is made of statistics and mathematical theorums. This has led to a specific subject of econometrics, where economic models are mathematically formulated, tested and applied. Some economists maintain that economics is in fact a part of mathematics and many would insist that all intending economics students should also study mathematics. Others however take a completely contrary view, suggesting that while a knowledge of mathematics may be of some assistance, particularly in endeavouring to understand the arguments of those who use it, economics is a natural and not a physical science and hence explicable in logic and language, not mathematical terms and symbols. In fact some would say that not only is a knowledge of mathematics not a necessity for the study of economics, but its use can be positively counter-productive, being suggestive of a nature and a rigidity of relationships which do not exist, leading ultimately to fundamental error.

Much [ some would say all ] of economics as a discipline or field of study is based on assumptions or hypotheses. At various stages and at different levels throughout the study of economics we make assumptions in order to reach useful or useable conclusions. For instance in order to analyse price movements in a specific commodity an economist might assume that price movements with respect to such commodity do not affect the price of any other commodity. On this assumption, a rise in the price of, say, tea will not affect the price of coffee. However in reality this will almost certainly not be the case. If the price of tea rises, then we would expect that people will buy less tea but will look for a substitute beverage such as coffee. As more people want to buy coffee we would expect the price of coffee to begin to rise also. Note that this analysis reveals an underlying assumption, viz that if the price of a good rises then people will buy less [and produce more] of it. However this in turn reveals an even further underlying assumption viz. that people will act rationally by choosing to buy less of a good as its price rises. The assumption of rationality is a primary assumption in economics. 

Economics makes use of a number of primary assumptions. However not all schools of economics accept or use the same primary assumptions. It is largely the differences in such primary assumptions which distinguish one school of economics from another, although there are some core assumptions which all or virtually all accept. That humans act rationally is one such generally accepted assumption. [We know of course that this is not always true and there are schools of economics which seek to accommodate this.] Others are the existence of the dimension of time and that events have causes. We should also bear in mind that virtually every primary assumption is in fact subject to challenge. Psychologists, physicists, philosophers and so forth at various times challenge the truth of all such primary assumptions. Generally speaking this should not unduly concern us, any more than acknowledging for instance that it is conceivable that tomorrow the sun might rise in the west.


In order more fully to understand the nature of assumptions we can look at the primary assumptions of a particular school of economics. The Austrian School is generally regarded as a radical free market school. It relies on a particular set of primary assumptions. From these assumptions or hypotheses we are able to deduce, using reason and logic, what are the consequences or results which are likely to arise or follow from any particular set of actions or circumstances. It should be noted that the source, choice and content of these assumptions is a matter of much debate. Basically the assumptions used are ‘a priori’ in nature. [A priori knowledge is that which comes to us naturally; that which if we were asked to substantiate its truth we would say “ It speaks for itself ”. They are the sorts of things we know without having to learn, just by being alive in the world. The other basic sort of knowledge consists of that which we learn from experience, experiment, observation, or study of the past. This is called ‘a posteriori’ or empirical knowledge]. The assumptions on which Austrian School economics is based include 

Regularity—the idea that there is order in the world eg if one steps off a cliff face one will fall; if water is heated it becomes warmer, and so forth. We do not, it is said, live in a world of chaos.

Logic—the rules of reason apply to all people at all times and in all places.

Causality—Events have causes; one thing leads to another. If a butterfly flaps its wings in the Amazon jungle, perhaps it can cause a typhoon in the Pacific. Whatever happens we can look for a cause.

Time—Events take place over time. Time passes.

Change—A consequence of time is that change is constant; everything changes. No one steps into the same river twice, nothing is ever the same. Hence the famous story of all wisdom encompassed in a single sentence.

Values—People have preferences; they prefer one person, condition or thing over another.

From assumptions such as the above, economists deduce the basic laws, rules and principles of economics. However there is not necessarily agreement on such alleged basic assumptions, even on those above. The differences in assumptions can and do lead to completely different sets of conclusions and form some of the bases for differences between various schools of economists. The assumptions chosen and most widely accepted tend to be those that most accurately reflect reality as we know it. Economics is a practical subject. There is ultimately only two types of economics; good and bad. Good economics is that which produces results most attuned to and consistent with such reality.

David Sharp


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