Economic Laws: Meaning and Nature

In this article we will discuss about Economic Laws. After reading this article you will learn about: 1. Meaning of Economic Laws 2. Nature of Economic Laws.

Meaning of Economic Laws:

A law (or generalisation) is the establishment of a general truth on the basis of particular observations or experiments which traces out a causal relationship between two or more phenomena. But economic laws are statements of general tendencies or uniformities in the relationships between two or more economic phenomena.

Marshall defined economic laws in these words, “Economic laws, or statements of economic tendencies, are those social laws, which relate to those branches of conduct in which the strength of the motives chiefly concerned can be measured by money price.”

It can be inferred from this definition that economic laws are:

(a) Statements of economic tendencies,

(b) Social laws,

(c) Concerned with human behaviour, and

(d) Human behaviour can be measured in money.

On the other hand, according to Robbins, “Economic laws are statements of uniformities about human behaviour concerning the disposal of scarce means with alternative uses for the achievement of ends that are unlimited.” These two definitions are common in that they consider economic laws as statements of tendencies or uniformities relating to human behaviour.

Nature of Economic Laws:

Scientific or like Natural or Physical Laws:

Economic laws are like scientific laws which trace out a causal relationship between two or more phenomena. As in natural sciences, a definite result is expected to follow from a particular cause in economics.

The law of gravitation states that things coming from above must fall to the ground at a specific rate, other things being equal. But when there is a storm, the gravitational force will be reduced and the law will not work properly. As pointed out by Marshall, “The law of gravitation is therefore, a statement of tendencies”. Similarly economic laws are statements of tendencies.

For instance, the law of demand states that other things remaining the same, a fall in price leads to an extension in demand and vice versa. Again, some economic laws are positive like scientific laws such as the Law of Diminishing Returns which deal with inanimate nature.

Since economic laws are like scientific laws, they are universally valid. According to Robbins, “Economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this sense, they are on the same footing as other scientific laws.”

Non-Precise like the Laws of Natural Sciences:

Despite these similarities, economic laws are not as precise and positive as the laws of natural sciences. This is because economic laws do not operate with as much certainty as the scientific laws. For instance, the law of gravitation must operate whatever the conditions may be.

Any object coming from above must fall to the ground. But demand will not increase with the fall in price if there is depression in the economy because consumers lack purchasing power. Therefore, according to Marshall, “There are no economic tendencies which act as steadily and can be measured as exactly as gravita­tion can, and consequently, there are no laws of economics which can be compared for precision with the law of gravitation.”

There is controlled experimentation in natural sciences and the natural scientist can test scientific laws very rapidly by altering natural conditions such as temperature and pressure in his experiments in the laboratory. But in economics, controlled experiments are not possible because an economic situation is never repeated exactly at another time.

Moreover, the economist has to deal with man who acts in accordance with his tastes, habits, idiosyncrasies, etc. The entire universe or that part of it in which he carries out his research is the economist’s laboratory.

As a result, predictions concerning human behaviour are liable to error. For instance, a rise in price may not lead to contraction in demand rather it may expand it, if people fear shortage of goods in anticipation of war.

Even if demand contracts as a result of the price rise, it is not possible to predict accurately how much the demand will contract. Thus economic laws “do not necessarily apply in every individual case; they may not be reliable in the ever-changing environment of real economy; and they are in no sense, of course, inviolable.”

Non-predictable like the Law of Tide:

But accurate predictions are not possible in economics alone. Even sciences like biology and meteorology cannot predict or forecast events correctly. The law of tide explains why the tide is strong at full moon and weak at the moon’s first quarter. On this basis, it is possible to predict the exact hour when the tide will rise.

But this may not happen. It may rise earlier or later than the predicted time due to some unforeseen circumstances. Marshall, therefore, compared the laws of economics with the laws of tides “rather than with simple and exact law of gravitation. For the actions of men are so various and uncertain that the best statements of tendencies, which we can make in a science of human conduct, must needs be inexact and faulty.”

Behaviourist:

Most economic laws are behaviourist, such as the law of diminishing marginal utility, the law of equi-marginal utility, the law of demand, etc., which depend upon human behaviour. But the behaviourist laws of economics are not as exact as the laws of natural sciences because they are based on human tendencies which are not uniform.

This is because all men are not rational beings. Moreover, they have to act under the existing social and legal institutions of the society in which they live. As rightly pointed out by Prof. Schumpeter: “Economic laws are much less stable than are the ‘laws’ of any physical science…and they work out differently in different institutional conditions”.

Indicative:

Unlike scientific laws, economic laws are not assertive. Rather, they are indicative. For instance, the Law of Demand simply indicates that other things being equal, quantity demanded varies inversely with price. But it does not assert that demand must fall when price increases.

Hypothetical:

Prof. Seligman characterised economic laws as “essentially hypothetical”, because they assume ‘other things being equal’ and draw conclusions from certain hypotheses. In this sense, all scientific laws are also hypothetical as they too assume the ceteris paribus clause (i.e. other things being equal). For instance, other things being equal, a combination of hydrogen and oxygen in the proportion of 2:1 will form water.

If, however, this proportion is varied or/and the required temperature and pressure are not maintained, water will not be formed. Still there is difference in hypothetical element present in economic laws as against scientific laws. It is more pronounced in the former because economics deals with human behaviour and natural sciences with matter.

But as compared with the laws of other social sciences, the laws of economics are less hypothetical but more exact, precise and accurate. This is because economies possesses the measuring rod of money which is not available to other social sciences like ethics, sociology, etc. which makes economics more pragmatic and exact.

Despite this, economic laws are less certain like the laws of social sciences because the value of money does not always remain constant. Rather, it changes from time to time.

Truisms or Axioms:

There are certain generalisations in economics which may be stated as truism. They are like axioms and do not have any empirical content, such as ‘saving is a function of income,’ ‘human wants are numerous’, etc. Such statements are universally valid and need no proof. So they are superior to scientific laws. But all economic laws are not like axioms and hence not universally true and valid.

Historico-Relative:

On the other hand, economists of the Historical School regarded economic laws as abstractions which are historico-relative, that is economic laws have only a limited application to a given time, place and environment.

They have limited validity to certain historical conditions and have no relevance to the analysis of social phenomena outside that. But Robbins does not agree with this view because according to him, economic laws are not historico-relative. They are simply relative to the existence of certain conditions which are assumed to be given.

If the assumptions are consistent with one another and if the process of reasoning is logical, economic laws would be universally valid. But these are big “ifs”. We, therefore, agree with Prof. Peterson that economic laws “are not detailed and photographically faithful reproductions of a portrait of the real world, but are rather simplified portraits whose purpose is to make the real world intelligible.”