Economics as Social Science

When you think about scientists, you probably think about geologists, biologists, physicists, chemists, and the like. But have you ever considered economics as a science? Although each of these fields has its own language (for example, geologists talk about rocks, sediments, and tectonic plates, while biologists talk about cells, the nervous system, and anatomy), they do have some things in common. If you would like to know what these commonalities are, and why economics is considered a social science as opposed to a natural science, read on!

Fig. 1 - Microscope

Economics as Social Science Definition

All scientific fields have a few things in common.

The first is objectivity, that is, the quest to find the truth. For example, a geologist may want to find out the truth about how a certain mountain range came into being, while a physicist may want to find the truth about what causes light rays to bend while going through water.

The second is discovery, that is, discovering new things, new ways of doing things, or new ways of thinking about things. For example, a chemist may be interested in creating a new chemical to improve the strength of an adhesive, while a pharmacist may desire to create a new drug to cure cancer. Similarly, an oceanographer may be interested in discovering new aquatic species.

The third is data collection and analysis. For example, a neurologist may want to collect and analyze data on brain wave action, while an astronomer may want to collect and analyze data to track the next comet.

Finally, there is the formulation and testing of theories. For example, a psychologist may formulate and test a theory about the impacts of stress on a person's behavior, while an astrophysicist may formulate and test a theory about the impact of the distance from the earth on the operability of a space probe.

So let's look at economics in light of these commonalities among the sciences. First, economists most certainly are objective, always wanting to know the truth about why certain things are happening among individuals, firms, and the economy at large. Second, economists are constantly in discovery mode, trying to find trends to explain what is happening and why, and always sharing new thoughts and ideas among themselves, and with policymakers, firms, and the media. Third, economists spend much of their time collecting and analyzing data to use in charts, tables, models, and reports. Finally, economists are always coming up with new theories and testing them for validity and usefulness.

Therefore, compared to the other sciences, the field of economics fits right in!

Like many scientific fields, the field of economics has two main sub-fields: microeconomics and macroeconomics.

Microeconomics is the study of how households and firms make decisions and interact in markets. For example, what happens with the supply of labor if wages rise, or what happens with wages if firms' costs of materials increase?

Macroeconomics is the study of economy-wide actions and impacts. For example, what happens to home prices if the Federal Reserve raises interest rates, or what happens to the unemployment rate if production costs decline?

Although these two sub-fields are different, they are connected. What happens at the micro level eventually manifests at the macro level. Therefore, in order to better understand macroeconomic events and impacts, it is vital to understand microeconomics as well. Sound decisions by households, firms, governments, and investors all hinge on a solid understanding of microeconomics.

Now, what have you noticed about what we've said so far about economics? Everything that economics as a science deals with involves people. At the micro level, economists study the behavior of households, firms, and governments. These are all different groups of people. At the macro level, economists study trends and the impact of policies on the overall economy, which consists of households, firms, and governments. Again, these are all groups of people. So whether at the micro level or the macro level, economists essentially study human behavior in response to the behavior of other humans. This is why economics is considered a social science, because it involves the study of humans, as opposed to rocks, stars, plants, or animals, as in the natural, or applied sciences.

Difference Between Economics as a Social Science and Economics as Applied Science

What is the difference between economics as a social science and economics as an applied science? Most people think of economics as a social science. What does that mean? At its core, economics is the study of human behavior, both the causes and effects. Since economics is the study of human behavior, the main problem is that economists cannot truly know what is going on inside a person's head that determines how they will act based on certain information, wants, or needs.

Fig. 2 - Farmer's Market

Therefore, instead of conducting experiments in real-time, economists generally have to rely on past events to determine cause and effect and formulate and test theories. (We say generally because there is a sub-field of economics that conducts randomized control trials to study microeconomic issues.)

An economist cannot just walk into a store and tell the manager to raise the price of a jacket and then sit there and watch how consumers react. Rather, they have to look at past data and come up with general conclusions about why things happened the way they did. In order to do this, they have to collect and analyze a lot of data. They can then formulate theories or create models to try to explain what happened and why. They then test their theories and models by comparing them to historical data, or empirical data, using statistical techniques to see if their theories and models are valid.

Theories and Models

Most of the time, economists, like other scientists, need to come up with a set of assumptions that help to make the situation at hand a little easier to understand. While a physicist may assume no friction when testing a theory about how long it will take for a ball to fall from a rooftop to the ground, an economist may make the assumption that wages are fixed in the short run when testing a theory about the effects of a war and the resulting oil supply shortage on inflation. Once a scientist can understand the simple version of their theory or model, they can then move on to see how well it explains the real world.

It is important to understand that scientists make certain assumptions based on what it is they are trying to understand. If an economist wants to understand the short-run effects of an economic event or policy, he or she will make a different set of assumptions compared to if the long-run effects are what they want to study. They will also use a different set of assumptions if they want to determine how a firm will act in a competitive market as opposed to a monopolistic market. The assumptions made depend on what questions the economist is trying to answer. Once the assumptions are made, the economist can then formulate a theory or model with a more simplistic view.

Using statistical and econometric techniques, theories can be used to create quantitative models that allow economists to make predictions. A model can also be a diagram or some other representation of economic theory that is not quantitative (does not use numbers or math). Statistics and econometrics can also help economists to measure the accuracy of their predictions, which is just as important as the prediction itself. After all, what good is a theory or a model if the resulting prediction is way off the mark?

The usefulness and validity of a theory or model depend on if it can, within some degree of error, explain and predict what the economist is trying to predict. Thus, economists are constantly revising and retesting their theories and models to make even better predictions down the road. If they still do not hold up, they are tossed aside, and a new theory or model is conjured up.

Now that we have a better understanding of theories and models, let's have a look at a couple of models widely used in economics, their assumptions, and what they tell us.

Circular Flow Model

First up is the Circular Flow model. As can be seen in Figure 3 below, this model shows the flow of goods, services, and factors of production going one way (inside blue arrows) and the flow of money going the other way (outside green arrows). To make the analysis more simple, this model assumes that there is no government and no international trade.

Households offer the factors of production (labor and capital) to firms, and firms purchase those factors in the factor markets (labor market, capital market). Firms then use those factors of production to produce goods and services. Households then purchase those goods and services in the final goods markets.

When firms purchase factors of production from households, households receive income. They use that income to purchase goods and services from the final goods markets. That money ends up being revenue for firms, some of which is used to purchase factors of production, and some of which is kept as profits.

This is a very basic model of how the economy is organized and how it functions, made simple by the assumption that there is no government and no international trade, the addition of which would make the model much more complex.

Fig. 3 - Circular Flow Model

Production Possibilities Frontier Model

Next is the production possibilities frontier model. This example assumes that an economy only produces two goods, sugar and wheat. Figure 4 below shows all the possible combinations of sugar and wheat that this economy can produce. If it produces all sugar it can produce no wheat, and if it produces all wheat it can produce no sugar. The curve, called the Production Possibilities Frontier (PPF), represents the set of all efficient combinations of sugar and wheat.

Fig. 4 - Production Possibilities Frontier

Any combination below the PPF, say at point P, is not efficient because the economy can produce more sugar without giving up the production of wheat, or it could produce more wheat without giving up the production of sugar, or it could produce more of both sugar and wheat at the same time.

Any combination above the PPF, say at point Q, is not possible because the economy simply doesn't have the resources to produce that combination of sugar and wheat.

Using Figure 5 below, we can discuss the concept of opportunity cost.

Fig. 5 - Detailed Production Possibilities Frontier

By assuming the economy can only produce two goods, we have been able to demonstrate the concepts of production capacity, efficiency, opportunity cost, economic growth, and economic decline. This model can be used to better describe and understand the real world.

Fig. 6 - Shifts in Production Possibilities Frontier

Prices and Markets

Prices and markets are integral to the understanding of economics as a social science. Prices are a signal as to what people want or need. The higher the demand for a good or service, the higher the price will be. The lower the demand for a good or service, the lower the price will be.

In a planned economy, the amount produced and the selling price are dictated by the government, resulting in a mismatch between supply and demand as well as much less consumer choice. In a market economy, the interaction between consumers and producers determines what is produced and consumed, and at what price, resulting in a much better match between supply and demand and much greater consumer choice.

At the micro level, demand represents the wants and needs of individuals and firms, and the price represents how much they are willing to pay. At the macro level, demand represents the wants and needs of the entire economy, and the price level represents the cost of goods and services throughout the economy. At either level, prices signal what goods and services are demanded in the economy, which then helps producers figure out what goods and services to bring to market and at what price. This interaction between consumers and producers is central to understanding economics as a social science.

Positive vs Normative Analysis

There are two types of analysis in economics; positive and normative.

For example, why are home prices falling? Is it because mortgage rates are rising? Is it because employment is falling? Is it because there is too much housing supply on the market? This kind of analysis lends itself best to formulating theories and models to explain what is going on and what may happen in the future.

For example, should caps be put on carbon emissions? Should taxes be raised? Should the minimum wage be raised? Should more housing be built? This kind of analysis lends itself best to policy design, cost-benefit analysis, and finding the right balance between equity and efficiency.

So What's The Difference?

Now that we know why economics is considered a science, and a social science at that, what is the difference between economics as a social science and economics as applied science? In truth, there really is not much of a difference. If an economist wants to study certain phenomena in the economy just for the sake of learning and advancing their understanding, this would not be considered applied science. That is because applied science is using the knowledge and understanding gained from research for a practical use to create a new invention, improve a system, or solve a problem. Now, if an economist were to use their research to help a company create a new product, improve their systems or operations, solve a problem at a firm or for the economy as a whole, or to suggest a new policy to improve the economy, that would be considered applied science.

In essence, social science and applied science only differ in that applied science actually puts what is learned to practical use.

Differentiate Economics as Social Science in Terms of Nature and Scope

How do we differentiate economics as a social science in terms of nature and scope? Economics is considered a social science rather than a natural science because while natural sciences deal with things of the earth and the cosmos, the nature of economics is studying human behavior and the interaction between consumers and producers in the market. Since the market, and a great number of products and services that are produced and consumed, are not considered part of nature, the scope of economics consists of the human realm, not the natural realm that is studied by physicists, chemists, biologists, geologists, astronomers, and the like. For the most part, economists are not concerned about what is happening deep beneath the sea, deep in the earth's crust, or in deep outer space. They are concerned with what is happening with the human beings living on the earth and why these things are happening. This is how we differentiate economics as social science in terms of nature and scope.

Fig. 7 - Chemistry Lab

Economics as Science of Scarcity

Economics is thought of as a science of scarcity. What does that mean? For firms, it means that resources, such as land, labor, capital, technology, and natural resources are limited. There is only so much output an economy can produce because all of these resources are limited in some way.

Land is limited by the size of the earth, the usability for farming or raising crops or building houses or factories, and by federal or local regulations on its use. Labor is limited by population size, the education and skills of workers, and their willingness to work. Capital is limited by the financial resources of firms and the natural resources required to build capital. Technology is limited by human ingenuity, the speed of innovation, and the costs required to bring new technologies to market. Natural resources are limited by how much of those resources are currently available and how much can be extracted in the future based on how fast those resources are replenished, if at all.

For individuals and households, it means that incomes, storage, usage, and time are limited. Incomes are limited by education, skills, the number of hours available to work, and the number of hours worked, as well as the number of jobs available. Storage is limited by space, whether the size of one's house, garage, or rented storage space, which means there are only so many things people can buy. Usage is limited by how many other things a person owns (if someone owns a bike, a motorcycle, a boat, and a jet ski, they can't all be used at the same time). Time is limited by the number of hours in a day, and the number of days in a person's lifetime.

Fig. 8 - Scarcity of Water

As you can see, with resources scarce for everyone in the economy, decisions have to be made based on trade-offs. Firms need to decide which products to produce (they can't produce everything), how much to produce (based on consumer demand as well as production capacity), how much to invest (their financial resources are limited), and how many people to hire (their financial resources and the space where employees work are limited). Consumers need to decide which goods to buy (they can't buy everything they want) and how much to buy (their incomes are limited). They also need to decide how much to consume now and how much to consume in the future. Finally, workers need to decide between going to school or getting a job, where to work (large or small firm, start-up or established firm, which industry, etc.), and when, where, and how much they want to work.

All of these choices for firms, consumers, and workers are made difficult because of scarcity. Economics is the study of human behavior and the interaction between consumers and producers in the market. Because human behavior and market interactions are based on decisions, which are influenced by scarcity, economics is thought of as a science of scarcity.

Economics as a Social Science Example

Let's put everything together in an example of economics as a social science.

Fig. 9 - Baseball Game

As you can see, all of the links in this cycle are based on human behavior and the interaction between consumers and producers in the market. In this example, we have used the circular flow model to show how the flow of goods and services, combined with the flow of money, allows the economy to function. In addition, there are opportunity costs involved, as deciding to do one thing (going to a baseball game) comes at the cost of not doing another thing (going fishing). Finally, all of these decisions in the chain are based on scarcity (scarcity of time, income, labor, resources, technology, etc.) for firms, consumers, and workers.

This kind of analysis of human behavior and the interaction between consumers and producers in the market is what economics is all about. This is why economics is considered a social science.