The Study of Individual Cases That Illustrate General Economic Laws

Economical Law: Nature and Its Limitations

In this article we volition discuss most economical law. After reading this article you will also acquire about nature and limitations of economic laws.

Meaning of Economic Law:

Every scientific discipline has its certain laws.

Thus, similar other sciences, eco­nomics has its own laws, likewise.

Such laws describe how a consumer or a producer behaves.

The consumer is assumed to maximise utility or satis­faction subject to the technological constraints under which the business firm oper­ates.

The nature and role of the economy are also the subjects of concern of economical laws.

Three of import economic activities are:

i. production,

ii. consumption and

iii. commutation of economic goods and services.

Economic laws have been framed to govern the conduct of these three economic activities. Economic laws are also concerned with the determina­tion of the level of employment and income as likewise with the distribution of national income or national production amid different social classes such every bit labourers, landlords and capitalists.

Finally, economic laws describe the pattern of growth of the real output of an economy over time. Modern economic growth is characterised by a very high rate of uppercase germination and extensive use of science-based technology.

It is also characterised past a high rate of growth in productivity, by structural shifts in the economy, nigh significantly from agriculture to industry then to services, by social and ideological changes, especially urbanisation and secularisation, and by much increased international economic linkages.

Economic laws likewise de­scribe the nature and causes of merchandise among nations. In fact, various eco­nomic laws have been framed encompassing all areas of economic assay, viz., production, consumption, market price decision, determination of income and employment as also the growth of the economic system, international trade and and so on.

Some of the near important economic laws are — the Constabulary of Diminishing Returns or the Law of Variable Proportions, the Law of Returns to Scale, the Law of Diminishing Marginal Utility, Keynes’ funda­mental psychological Police of Consumption, the Police of Equi-marginal Util­ity, the Constabulary of Comparative Advantage, Marx’s Laws of the Motions of Capitalism then on.

However, Robbins broadened the scope of economic laws by suggesting that whatsoever activity of man will come under the purview of the la w of econom­ics, provided it is concerned with the resource allotment of scarce resources among unlimited uses. Whether this activity (i.e., whatever objective or behave of human) is continued with coin earning and money spending is beside the point.

Thus, economists have to formulate laws which are statements of tendencies governing man behaviour involving choice among alternatives. How­ever, all types of human behaviour are non relevant in this context.

Only those aspects of human being behaviour which are concerned with the utilisation of deficient resources for satisfying unlimited wants are taken into considera­tion while formulating economic laws. Robbins, nonetheless, was not inter­ested whether the variables and objects involved in the problem of choice could exist quantified with the measuring rod of money.

Nature of Economic Laws:

Economic Laws as mere Statements of Tendencies:

Since the days of the classical economists the nature of economical laws has aroused a lot of controversy among the economists. The classical economists discovered the operation of the law of diminishing returns in agronomics which was the well-nigh important economic activity on the eve of Industrial Revolution (which started effectually 1760).

However, the classical economists did non say anything about the nature of economic laws. They believed that these laws were comparable to the laws of nature.

Alfred Marshall first pointed out that economic laws were not definite, precise or exact like the laws of concrete sciences. Instead, in his view, such laws are merely statements of tendencies.

In truth, economic laws are highly conditional. Such laws are often stated in an ‘if-then’ form, i.e., in the form: if these assumptions are made then this volition happen. Moreover, economic laws are field of study to a number of qualifications. All these qualifications are captured under the phrase ‘all other things remaining the same’ or under the broad heading the ‘ceteris paribus’ assump­tion.

In fact, with well-nigh every important police of economics, such as the constabulary of need, the law of supply, Keynes’ primal psychological law of consumption, we adhere the ceteris paribus clause. Even the quantity theory of money predicts that, ceteris paribus there is a direct and proportional human relationship between the money supply and the general price level. Merely, in a dynamic earth these ‘other things’ hardly remain constant. Thus, nosotros are forced to relax the ceteris paribus assumption in practise.

At times we notice the necessity of relaxing this assumption. For example co-ordinate to the laws of demand and supply, if the market toll of a commodity falls people will purchase more than of it. Merely, if a fall in price is immedi­ately followed by a fall in the income of the buyers they may continue to purchase the same quantity or fifty-fifty less at a lower price. This, however, does not contradict the law of demand.

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This simply shows that the ceteris paribus assumption no longer holds, i.e., we cannot e’er vary only one variable — here price — keeping all other variables, such as income of buyers, their tastes and preferences, toll of related goods (substitutes and complements) and so on, unchanged. In this case the assumption has been violated due to an increment in buyers’ income.

Let us consider another example. Suppose, the toll production of com­puters falls due to technological progress. It may apparently seem that equally a result of fall in price per unit the quantity offered for sale will increase. But suppose that the government imposes an boosted excise duty on comput­ers.

This, in its turn, will lead to an increase in cost per unit and a consequent fall in the quantity of the commodity supplied in the market. The end result (i.e., whether quantity offered for auction will increment or fall) is not known to u.s..

Thus, in both the cases the ceteris paribus assumption has been violated. For computers the constabulary of demand has been violated due to income modify and the law of supply has been violated due to imposition of a tax on computers.

In a like mode the constabulary of diminishing returns refers to diminishing marginal product of the variable gene (say, labour).

The law or hypothesis only states that, every bit more than and more than workers are employed in the produc­tion process, keeping all other factors unchanged, every additional worker will gradually make less and less-contribution to the total production In other words, the marginal product of labour will fall beyond a item point.

There may be an initial stage of increasing returns but the stage of dimin­ishing returns will ultimately be reached. However, technological progress may avert the operation of the law of diminishing returns. India’s Dark-green Revolution has proved this point.

In some parts of India the marginal product of labour, instead of diminishing, has really increased. However this does not show that the police force of diminishing returns is incorrect This is because the law is based on the ceteris paribus assumption, i.e., information technology assumes that all other things, such as agrarian technology, remain unchanged during the period under consideration.

A related betoken may too exist noted in this context. Economic laws are not at all comparable to legal laws passed past the authorities or by the parlia­ment. The citizens of a country are under the legal obligation to obey such laws.

Any violation of such laws is punishable. In contrast, an economic police seeks to clearly indicate how a rational individual behaves equally a con­sumer, a factor supplier or as a producer. In other words, economic laws tell the states how people behave rationally in their economic life.

The Scientific Nature of Economic Laws:

Scientific laws seek to establish cause-and-event relationships. Economic laws also try to exercise the same thing. Such laws seek to establish behaviour of man and economic phenomena. Hence, economical laws are scientific in nature. Economists first try to study the behaviour of a rational private — equally a consumer or as a producer.

The objective of such study is to discover a particular blazon of behaviour, i.east., how scarce resources are used to satisfy wants. Then the behaviour of several individuals is studied to find out whether any item pattern of behaviour emerges.

By observing the behaviour of several people economists effort to establish certain generalisations or general principles of human behaviour, i.east., the behaviour of ra­tional individuals in economic life. Such generalisations or general principles are known as economical laws.

This is why Alfred Marshall commented that, economical laws are cypher other than general tendencies of man’s behaviour in his economic life in which he is primarily concerned with economical activities i.e., money earning and coin spending.

Economic laws are of scientific nature, because such laws, like other scientific laws, establish crusade-and-upshot relationships. To illustrate the point we may refer to a number of laws of economics in this context. Let us first consider the police of demand. According to this law, the quantity demanded of a commodity varies inversely with its price.

A change in market toll of a article leads to a alter in the quantity demanded. Thus, change in price is the cause and the change in quantity demanded is the outcome. Also, the law of diminishing marginal utility states that as the consumption of a commodity increases every extra unit of it provides less and less boosted satisfaction to the consumer.

Thus, marginal utility diminishes. Here, an increase in consumption is the cause and a fall in marginal utility is the effect. Similarly, Keynes’ fundamental psychological law of consumption states that as an individual’south income increases, his consumption expenditure also increases, though non proportionally.

This implies a fall on the marginal propensity to consume (which is the ratio of the alter in consumption to the change in income). Here, income modify is the cause and consumption alter is the outcome. Such a cause-and- event relationship holds for all economic laws.

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From our illustrations information technology is clear that, economic laws similar all scientific laws are hypothetical and conditional and are always stated in form, i.due east., if this condition holds this result will follow or if this supposition is made, this decision will emerge. Then, we cannot disprove the scientific nature of economical laws.

In fact, like all scientific laws, economic laws concur good only nether certain weather, i.due east., they are hypothetical in nature. So, there is nothing unique or peculiar nigh economic laws. That economic laws are hypothetical in nature does not deny their scientific character. Thus, eco­nomic laws are no less useful and important than other scientific laws, i.e., the laws of natural science.

Carefulness and Definiteness of Economic Laws:

If nosotros brand a comparing between economic laws and laws of physical sciences nosotros observe that economical laws are less verbal and definite than those of physical sciences. For example, the Law of Diminishing Returns is less exact and definite than the Law of Gravitation.

While we tin ever accurately calculate and exactly measure the movements of the solar system and predict their verbal position at a fixed point of time, we cannot predict the behaviour of different individuals in response to a detail change or the behaviour of the aforementioned individual in response to the same stimuli at different time periods.

We can brand use of economic laws to say that a man could tend to acquit in a detail way in a sure state of affairs, but such laws cannot tell us how a man would really comport in response to a particular alter. For diverse reasons — economical and non-economic — people tend to carry differently and quite reverse to what a particular law would suggest.

This explains why Alfred Marshall compared the laws of economics with the laws of tides rather than with the uncomplicated and exact law of gravitation. The laws of tides tell united states that tides move upwards and down (i.e., rise and autumn) twice a day. These tides are the strongest on full moon nights when they rising to maximum heights.

A scientist would always be interested in ascertaining from these laws what would be the verbal pinnacle of these tides at a certain place on a particular day.

Only, it is non possible for the scientist to state definitely, i.e., with complete certainty, what the heights of these tides would be, considering they are affected past external weather at a item place, say the Sunderban surface area (situated on the Bay of Bengal) and time; it is not possible to predict how much tides ascent on a item date or time.

A scientist can simply go a step ahead of others and say that if all the external conditions affecting tides remain unchanged during the obser­vation menstruum, the boilerplate height of these tides at a particular place (say the Kovalam beach of Kerala) and a particular time can be calculated. Similar the laws of the tides, the laws in economic science are also inexact and inaccurate.

A question is probable to arise at this stage:

Why are economic laws less definite and exact than those of natural scientific discipline? The answer is that the object of economic study is such that economic laws are leap to exist inexact and indefinite. The bones object of economical study is to discover the behaviour of human faced with the problem of satisfying unlimited wants with limited resources (means).

However, the behaviour of a man depends non only on his tastes (shown by indifference curves) and income (shown by the budget line) but likewise on various factors which are external to him and hence beyond his command, such equally customs and tradition, social surround, family conditions then on.

All these keep on changing from time to fourth dimension. Therefore it is quite obvious that economic laws formulated by establishing cause-and-effect relationship regarding human behaviour are bound to be less verbal and less definite than laws of concrete sciences where external conditions tin be controlled.

In that location are two important ways of establishing economic laws. First, by empirical observations. Since economics is concerned with how we solve society’south economic problems, we have to make a shut scrutiny of man’south actions and reactions in the real world.

This will enable us to found economic laws, i.eastward., laws relating to national economic behaviour, or, the bodily behaviour of man in the economic world. Secondly, economical laws can exist formulated by making employ of introspective or psychological methods.

Homo beings are very unlike in their nature. And so, formulation of economical laws past studying human behaviour solitary is not an easy chore.

Yet, economists often proceed on the basis of the supposition that people often behave in a similar style in a particular situation or react in the same way to a particular stimulation. Thus, economists often make generalisations most the economic behaviour of human on the basis of their own psychological reactions to a certain phenomenon.

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Economists no dubiety enjoy an reward other than social scientists in having a universal yardstick for measuring rod with which they can and always brand an overall cess of human motives or optimisation (maximisation or minimisation) goals as also the results of human actions.

The Transitory Nature of Economic Laws:

Apart from inexactness and lack of definiteness economical laws accept other drawbacks likewise. Unlike the laws of physical sciences, economic laws are not of a universal nature beyond fourth dimension. In other words, such laws exercise non ever agree true. The reason is easy to discover out. Economical laws are generally formulated in a particular social-institutional environment.

Therefore, in the issue of a change in the environment or social-institutional set up, an established law may lose its relevance. The present economic life of man is the consequence of a long procedure of historical evolution. In the process, various changes have taken place in the institutional set.

Such changes, in their turn, have led to changes in economic laws. For example, various laws of economics which plant application in archaic societies gradually lost their relevance in later stages of agricultural and industrial evolution.

Relative Nature of Economic Laws:

In fact, all economic laws are not alike. They are of two broad categories, (a) universal laws, and (b) relative laws. Economic laws such equally the law of demand or the law of diminishing returns (or increasing costs) are univer­emerge applicable — applicable in all places and at all times. In contrast, some laws relating to money or economic systems are not applicable everywhere and at all times.

For case, the Gresham’s Police force states that bad money will drive skilful money out of circulation. Only, this constabulary does non always hold true. Similarly, Marxian laws of economic development are applicable to capitalist countries and non to socialist countries or even mixed economies. Information technology is so because such laws are related to specific blazon of economic organisa­tion, viz., and capitalism.

Limitation of Economic Laws:

One major drawback of economic laws is they lack generality. For example, the laws developed to explain the nature and functioning of capitalist economies do not take whatever relevance for socialist countries. For example, Alfred Marshall developed the laws of need and supply which employ in a free market in the absence of government intervention.

Such laws do not apply in the erstwhile countries like the former Soviet Union where the cost (market) system yielded identify to the planning arrangement. In a planned economy, market mechanism is replaced by government allocation or ra­tioning. So, the question of applying the laws of demand and supply does not arise. Thus, economical laws lack generality and are not universally applicable.

Furthermore, some laws of economics which have been adult in the context of advanced industrial countries may not find awarding in devel­oping countries similar India. As V. K. R. 5. Rao has pointed out, the multiplier principle, every bit enuncited by Keynes in the context of the advanced countries of the earth, does non work in developing countries like India. This is attributable to the structure of such economies.

Similarly, the Quantity Theory of Money has been developed in the context of industrially advanced countries. It seeks to institute an verbal, proportional relationship between money and prices. But, it cannot explain’ the present toll state of affairs in India.

Here, aggrandizement is non purely monetary phenomenon as predicted past the Quantity Theory. These two examples brand one thing clear at least — the laws and theories of economics devel­oped in the context of advanced countries cannot be applied in developing countries like Republic of india.

In fact, there is a feeling among some group of economists that, people in developing countries similar India behave and respond differently from those of advanced countries. For example, greater self-consumption of farmers in India explain why the supply response of agricultural commodi­ties is non always favourable in the event of a ascent in the price of agricultural products.

It is often observed that, if the cost of a particular article rises, farmers produce less of information technology so as to maintain the same level of income. Thus,’ they not only produce less at higher cost simply generate less marketable surplus when price rises.

Thus, the marketable surplus of, say, wheat varies inversely with its price. But, in developed countries it is observed that, equally usual, the supply curve of agronomical output slopes up from left to right and marketable surplus increases when price rises.

All these examples make information technology abundantly clear that, about of the laws and principles of economics which take been developed in the context of advanced countries cannot be applied in developing countries similar India.




The Study of Individual Cases That Illustrate General Economic Laws

Source: https://www.economicsdiscussion.net/economic-problems/economic-laws/economic-law-nature-and-its-limitations/25112

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