LOGIC & METHODOLOGY

I. HYPOTHESIS
1. A hypothesis is a conditional statement showing relations between phenomena. 2. Basic form : If A , then B .
Q : Suppose A is true, based on the above hypothesis, what can you conclude ?

It should be noted that, in the above statement, A is called an antecedent or assumption or a postulate, whereas B is the consequence or outcome. Also, A may be unrealistic. 3. Example : If a piece of chalk is dropped onto the floor, it breaks. Q : - In the above hypothesis, what is the assumption? - Suppose that the above hypothesis is correct and that a piece of chalk is dropped onto the floor, what would you predict to occur ( i.e. the consequence ) ? - In reality, do you always observe someone dropping a piece onto the floor ?
Therefore, can you suggest a characteristic of an assumption?

- Is the above hypothesis always true ( i.e. whenever a piece of chalk is dropped onto the floor, it breaks ) ? 4. Hypotheses are made to explain or predict certain consequences by the assumptions. 5 Characteristics of a hypothesis : a. The assumption and consequence must be observable implications or they must have some observable propositions, otherwise that hypothesis cannot be tested. b. A hypothesis is a refutable statement. c. A hypothesis is supported by not having not B when A is given in quite a large number of tests.

d. A hypothesis is refuted when one counter example is found .

II. THEORY
1. A theory is a validated hypothesis. If the implications and predictions derived from a hypothesis are found to be consistent with the occurrence of actual events, then the hypothesis can become a theory. Alternatively, a theory is a set of statements ( including the postulates, test conditions and predictions ) logically organized to explain or predict phenomena. If these validated hypotheses are within the scope of economics, they are called economic theories. If a theory is not refuted by facts for a long time, it is called a law or principle. Characteristics of a theory : a. A useful theory must possess great explanatory or predictive power. It is noted that predictive power is different from forecasting power . b. ( I ) A theory must be refutable. A useful theory is one which may be unrealistic ( i.e. can be refuted by empirical evidence ) If a theory is not refuted by facts, it is supported/confirmed. ( It is noted that a theory cannot be proved because there is still a possibility that future events may not support it. ) Therefore, a useful theory must be refutable nut not yet been refuted by empirical evidence . ( ii ) A theory must be testable. ( iii ) The variables ( i.e. assumptions and consequences ) contained in a theory must be observable or they have observable implications. c. A theory usually carries some assumptions. e.g. the law of demand

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d. A useful theory must be logically consistent. e.g. A theory of car ownership Californians owned more cars than H.K people because: ( i ) buses were more frequent and served a wider network, and ( ii ) there were more roads in California than in H.K. With the postulate that people maximize the value of their time, theory ( i ) is logically inconsistent whereas theory (ii ) is logically consistent.

III. ASSUMPTION & AXIOM ( POSTULATE )

1. Types of assumptions: a. Axioms / postulates are the assumptions common to all the economic models. e.g. the basic axiom of economics ( i.e. people maximize subject to constraints ) b. Simplifying assumptions are made for simplifying the analysis. Relaxing them does not affect the conclusions of the theory.

c. Test conditions / constraints are conditions specified for testing a hypothesis. e.g. If an experiment requires the use of a clean test tube ( i.e. a test condition ) for testing a theory, one cannot use a dirty test tube and assume it to be clean.

IV. USEFULNESS OF A THEORY

1. Economic theories are frequently criticized for their highly unrealistic assumptions ( i.e. the assumptions do not accurately describe human behaviour ) . E.g. The maximizing postulate ( Most people are not aware of it when making a decision . ) - The simplifying assumptions ( They produce a simplified picture that does not represent the reality . ) 2. The unrealism of assumptions are then said to make economic theory useless in explaining behavior. It is argued that, since the assumptions are wrong (i.e. unrealistic) , the theory built on them must also be wrong . However, the above line of reasoning is problematic ! It is because a the usefulness of a theory is not judged by the realism of its assumptions, but

by its explanatory and predictive power. - If it can explain and predict changes in human behavior, it is useful. A theory is refuted only if empirical data contradicts its implications, but will be accepted / confirmed if empirical data fails to reject its implications. b. a theory may hold even if its assumptions are false. - By logical reasoning, if A implies B, the not A does not imply not B. To argue that not A implies not B is to commit the fallacy of denying the antecedent . Therefore, it is a fallacy to attack a theory by falsifying its antecedent as even if one can prove that A is false, there is nothing to do with B. Example: If rain (A) implies there is cloud (B), the lack of rain ( not A) does not imply there is no cloud ( not B).Thus , to argue that no rain ( not A) implies no cloud ( not B) is to commit the fallacy of denying the antecedent.

3. A remark about the realism of assumptions : However, assumptions need to be realistic when they are to serve as the test conditions. It is because if the test conditions do not conform to what happens in reality, data cannot be collected to test the theorys implication, and it is thus impossible to support or reject the theory.

V. SOME LOGICAL FALLACIES

1. The Circular Argument E.g. Mary : Why is a demand curve downward ? John : It is because price and quantity demanded are inversely related. Mary : Then why are price and quantity demanded inversely related ? John : It is because a demand curve is downward sloping. 2. The Fallacy of Affirming the Consequent Given : If it rains (A), then there is cloud (B). If there is cloud (B), then it rains (A).

If there is cloud (B), then A or not A. 3. The Fallacy of Denying the Antecedent Given : If it rains (A), then there is cloud (B). If it does not rain (not A), then there is no cloud (not B). If it does not rain (not A), then B or not B. Q : A wealth maximizer will produce at a point where MC = MR. What can be concluded if a person is not a wealth maximizer ?

Q : Given If A, then B. By logical deduction, if not B, then not A.

VI. GENERALITY OF A THEORY

A. Tautology 1. 2. A tautology is a statement which is irrefutable. (a) Definitional identities are tautology because they are always true. E.g. When the unemployment rate continues to rise, more and more people will be out of work. (b) Untestable statements are tautological because they cannot conceivably be false. E.g. Mary failed in the exam as she was unlucky. As a tautology is always true ( irrefutable), it cannot be used to explain why or predict how behavior will change. Hence, it has nothing to do with economic analysis.

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Q : Which of the following statements is/are tautological ? i. It is a four-leg animal because it has four legs. ii. The sun has the same weight as the earth. iii. The share price of a company is negative related to its net profit. iv. The equilibrium oil price is determined by demand and supply conditions.

B. Ad Hoc Theory
1. An ad hoc theory is one which lacks generality. It holds only under a particular set of conditions, thus cannot be generalized to any other situation. Example : Sales stalls, in the mini-bazaar, raise more money than games stalls provided that.. 2. In terms of generality, tautology and ad hoc theories represent two extremes. A useful theory usually lies between these two extremes. Some questions of methodology 1. Is economics a science? 2. Why is it that in general, natural science advance at a much faster pace than social secience? 3. Distinguish beween positive and normative statements. 4. Why should science be strictly positive? 5. Distinguish between describing the phenomena and explaining the phenomena. 6. Theories are abstractions of the world, not an actual reproduction of the details of the world Discuss. 7. Theories must be refutable. Discuss. 8. Theories are logically consistent Discuss. 9. Distinguish between Ad Hoc theory and tautology. 10. Should the assumptions of a theory be realistic?