Limitation of Economics

‘‘ECONOMICS is a science which studies human behaviour as a relationship between ends and scarce means that have alternative uses.’’- By Lionel Robbins, an economist in an attempt to define Economics. Lionel considered the study of economics to be a social science that concerns itself with the investigation of how man maximizes his satisfaction from the limited resources at his disposal and not forgetting the fact that these available limited resources can be channelled into the production of other goods.
‘‘An ECONOMY consists of the economic system of a country or other area, the labour, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution and consumption of goods and services of that area.’’- According to Wikipedia (an online encyclopaedia) in defining an ECONOMY. This implies that an ECONOMY is the sum total of all commercial activities including buying, selling, distribution, among others.
The relationship between ECONOMICS and an ECONOMY (or economies) is that ECONOMICS aims at explaining how an ECONOMY (or economies) works and how economic agents (i.e. Individuals, households, firms, and the government) interact.
ECONOMICS is seen as a tool for analysis because it carefully examines human behaviour in relation to the market or how an economy works to aid individuals to have better understanding of economic events. Economists analyse a problem in three (3) major steps. First, there is observation of a phenomenon and the problem is formulated. All other things being equal, when price of a commodity increases, quantity demanded decreases and vice versa. One may decide to know and understand what this relationship is and why it even exists.
Secondly, a theory or a model is developed to capture the phenomenon and also simplify the phenomenon to aid easy understanding and work of the economist. By considering the change in price and its effect on quantity demanded, one tries to ascertain the factors that cause change in the price of the commodity itself. These factors can then be captured by an economic model to analyse and explain outcomes.
Finally, we test the predictions of the theory by confronting it with economic data. An econometric examination of the data can quantify the things the model identifies. We can see if, on the average, they are in line with what the model suggests. It may be found out that in our quest for simplicity in the model some important factors are left out, we can check that the extra influences were sufficiently unimportant that made sense to omit them from our analysis. If after matching our theory against the real world we detect incompatibility, we do not reject our theory. When model is rejected by the data, then we start again. Even if the model is not rejected it does not imply is the best for the data but just because we have not found an equally good model for it. If we derive confidently that a relationship exists between two or more variables, these relationships become Economic Laws. E.g. The Law of Diminishing Marginal Returns which states that “All other things being equal, as more successive units of a variable input is added to a fixed input, output initially increases, attains constant returns and eventually falls.”
‘’We must not look for the same degree of accuracy in all subjects; we must be content in each class of subjects with accuracy of such a kind as the subject matters allows, and to such an extent as is proper to the inquiry.’’ - Aristotle, Nicomachean Ethics. He made this conclusion to bring out the fact that economics has got its own shortcomings and as such needs to be observed.
To begin with, Economics as a science study has got its limitations. Due to assumptions that economics places to hold some variables constant, it is said to reduce the complex realities to a simple manageable situation to aid carry out investigations and analysis easily. They achieve this using phrases like ‘all other things being equal’ or ‘ceteris paribus’ and even ‘holding other things constant or unchanged’. In deriving the supply curve, it is assumed that price of the commodity is the only factor that attributes to change in the quantity supplied but in real world instances it is never true due to factors like climate change and size of the population that also can result to such change. Its object of study i.e. human beings also posses challenge on their analysis because their behaviour is not constant but varies over time. Its area of analyses or study, that is it studies only human behaviour forgetting other factors that affect the human behaviour like the environment. Economics also has no laboratory as in the case of physical sciences to carry out their investigation. It assumes the market place as its laboratory and carries out its activities there. This is mainly due to fact that their objects of study i.e. human beings are animate. The study of economics has no sophisticated tools to carry out it operation. This makes economic analyses very complex.
Also, models in economics are so simple and have very little to do with reality. A model is a simplification of economic situations for easy analysis and understanding of happenings in an economy. A good model is very brief but does not distort reality and manages to capture main features of a problem. But human behaviours economics studies are so complex to be captured by a simple economic model.
Some generalisations that are made by economist are considered to be wrong and create disagreement between microeconomics and macroeconomics. Considering the fallacies of division and composition; where the fallacy of division considers that a generalisation at the macro (whole economy) is assumed for all micro (individual) levels. E.g. it assumed that an increase in inflation implies an increase in the general prices of goods and services in the country but in the real world it might not be true. Also, the fallacy of composition talks about the fact that decisions taking at an individual (micro level) affect the whole economy (macro level). E.g. when an increase in an individual’s income is assumed to have a corresponding increase in the National Income level i.e. GDP. It is may not be true because it may not necessarily result to that since some individuals too may not have seen any change or even have a reduction in their income levels.
The issue that ‘‘no two economists agree’’ also posses a limitation on the study of economics. This disagreement is mainly due to the positive economics and normative economics. Economists may agree on the positive economics of how an economy works but they may disagree on normative economics because they may have different value judgements for happenings. This may also be due to the different Schools of Thought that these economists may belong to; because they may have different ideologies and procedures of analysing and offering solutions to problems
To conclude, people are not mercenary as economists think. Economists believe that most of the phenomenon they study, such as the choice of commodities that one may select is due to or mainly determined by economic incentives. This does not mean economic incentives are all that matters. Other factor such as effective advertisement, religious and even change in social attitudes could also intensify one’s interest in a commodity. Therefore knowledge of politics, sociology and psychology is needed for a more complete description of human behaviour. But economists ignore these and only concentrate on effective economic incentive.
Although economics play vital roles in the investigation of phenomena, general decision making, policy formulation and implementation, other economies (people) hold the view that ECONOMICS is more than useless. This mainly due to the fact that economics as a science and also a tool for analyses has got some shortcomings (limitations). This forces some economies to see economists’ outcomes and generations unnecessary and irrelevant. Some of these factors are outlined above.