The Scientific Methods in the Study of Economics

Testing Hypotheses, Developing Theories

  • Harvard economist N. Gregory Mankiw, author of "Principles of Economics" and a former White House adviser, calls the scientific method, which requires the development and testing of theories, the essence of science. In economics, this means developing theories about such questions as what causes inflation, why people save or consume, and what conditions favor increased hiring and investment by firms. To explain these and other economic issues, economists develop hypotheses, collect and analyze data, and formulate theories based on their results. Economists may revise or refine existing theories in response to further examination and analysis that advances previously existing knowledge.

Observation and Theory

  • Economists develop their theories about how the worlds of economics and finance work based on extensive observation of real-world activities. Mankiw cites as an example an economist who lives in a country experiencing rapid inflation. This economist may devise a hypothesis of why inflation increases, then test this hypothesis by collecting and analyzing data from other countries. These data will include information on prices, money supplies, consumer and business activity, and government spending.


  • Although economics relies on observation and theory like other sciences, economists face an obstacle that their counterparts in natural sciences such as biology and chemistry do not have: the lack of laboratory controls. Mankiw points out that while physicists can repeatedly drop objects from different heights to test the theory of gravity, economists cannot manipulate national monetary policy to test theories about inflation. Economic researchers must do what they can with the data that the real world supplies them are unable to conduct controlled laboratory experiments, economists often look to history for lessons and explanations about how the economic world works, according to Mankiw. Analysis of historical events represents another scientific method by which researchers understand and explain present-day economics.


  • Like other scientists, economists use models to convey simplified explanations of a complex world. For economists, these models consist of diagrams and mathematical equations that explain such concepts as supply and demand, and gross domestic product. Like other fields of science, economic models present a simplified version of reality. Just as an astronomer's model of the solar system does not fully account for the complexity of the cosmos, an economist's model does not include every feature of a dynamic modern economy. Yet, through their simplicity, economic models help illustrate how the economic world works.


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