Economics as a Social Science: Objects, Methods, and Analytical Approaches

Concept and Classification of Economic Science

The fundamental challenge of humanity throughout history has been survival, pursued through both individual and collective efforts to extract necessary resources from nature. These efforts encompass the tasks of provisioning, production, and distribution of goods and services. Before the emergence of economic science, the body of knowledge related to these activities was categorized as an "empirical art," primarily aimed at providing rulers with practical rules to solve immediate problems. Economics only recently established itself as an independent branch of human knowledge. The economist Robert L. Heilbroner, in his work The Worldly Philosophers (Vida y Doctrina de los Grandes Economistas), notes that until the Industrial Revolution in the $18^{th}$ century ($XVIII$), civilization did not feel the need to modernize or scientifically model the economy. This was because economic activity was previously driven by coercion (the whip) or tradition (custom), which did not require a scientific model to understand social behavioral mechanisms for improvement.

The term "economy" derives from the Greek words oikos (house) and nomos (government or law). It is classified as a social science alongside sociology, political science, anthropology, and psychology, as they all examine different aspects of human society. While there is no single fixed definition, various schools of thought have characterized it differently. Mercantilists and classical economists such as A. Smith, D. Ricardo, and J. Stuart Mill defined it as the science of wealth. Conversely, economists of the Austrian School focused on the scarcity of resources. Today, two widely used definitions prevail. Professors Dornsbuch and Fischer describe economics through its attempt to answer three societal questions: What goods and services to produce? How to produce them? And for whom to produce them? Professor Robbins defines it as the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. This perspective emphasizes the necessity of prioritizing and hierarchizing different objectives.

Branches and Methodology of Economics

Economic science is characterized as both an empirical and social science, as well as a monolithic body of knowledge divided into two primary perspectives. Positive Economics seeks objective explanations for how the economy functions, describing "what is." Normative Economics offers prescriptions and recipes based on subjective personal value judgments, describing "what should be." These two are deeply interconnected, as one cannot effectively discuss what should be done without a prior understanding of the economic phenomenon in question. Within Positive Economics, there are two major fields of study: Microeconomics and Macroeconomics.

Microeconomics, from the Greek mikros (small), focuses on individual economic agents such as households, firms, and governments. Its inquiries include consumer behavior and the maximization of firm profits. Macroeconomics, from the Greek makros (large), studies the overall economic environment in which individual agents operate. It examines aggregate variables such as the level of income in the economy and the overall employment level.

The goal of economic science is to understand the economy's functioning through laws and theories. A "Law" describes universal phenomena that occur regardless of historical, geographic, social, or cultural contexts. A "Theory" provides the scientific framework describing processes within a specific context. Because individual economic behavior is mediated by diverse circumstances, economic science relies more on theories than on universal laws. Economic models, built upon these theories, are simplifications of reality that use hypotheses and assumptions to infer the behavior of an endogenous variable (within the model) based on known exogenous variables (outside the model).

Research in economics utilizes two main methods: the inductive method, which moves from the observation of reality to general principles, and the deductive method, based on logical deductions from a priori axioms without initial empirical observation. By observing natural phenomena, scientists use induction to extract hypotheses, then use deduction to formulate theories and laws, which must eventually be verified.

Economic Variables, Data, and Measurement

Data serves as the raw material for economic analysis. To operate with economic variables, one must have access to data, which can be presented in its raw form or as elaborate indices and percentage variations. Index Numbers are used when a series of data needs to be compared against a specific point in time; a base period is selected, and subsequent data is expressed relative to that index. Percentage variations allow for the comparison of quantifiable variables across different units of measure and the determination of changes over time.

Data is structured in three primary ways. A Time Series is a set of measurements of a variable at different points or intervals of time. A Cross-Section provides information on a variable at a single moment in time but differs across sources or characteristics of the reporting units. Panel Data is a combination of both time series and cross-sectional data, providing the most comprehensive information for a phenomenon. Variables are further categorized based on their roles and timing:

1. By functional relationship: Endogenous variables are determined within the model, while Exogenous variables have values determined independently of the model.

2. By time reference: Stock variables refer to a specific point in time, whereas Flow variables only make sense when referred to a specific duration or period.

3. By inflation adjustment: Nominal or current variables use raw historical data. Real or constant variables are adjusted for changes in purchasing power. Because the value of a currency like the Euro changes over time, comparisons must be homogenized through "deflating." This is achieved by dividing the nominal variable by a price index to remove the distortion of inflation ($\text{Real Variable} = \frac{\text{Nominal Variable}}{\text{Price Index}}$).

4. By measurability: Extensive variables can be measured, while Intensive variables cannot be measured.

Society's Resources and Productive Factors

Human happiness depends on both material and spiritual fulfillment; economics focuses on material happiness. Material needs are characterized as being unlimited and dynamic, evolving as society changes. However, resources are limited, making scarcity a fundamental economic reality. Goods and services are anything that satisfies human desires directly or indirectly. Consumption goods and services (acquired by families) are split into perishable (disappear after use or a certain date) and durable (provide service over a period of time, such as housing). Capital goods and services are acquired by businesses to be applied in the production process.

The production process requires inputs known as factors of production, classified into three groups. Natural Resources include all raw materials provided by nature; these can be renewable (partially or totally replaceable by nature) or non-renewable (exhausted upon use). Labor ($L$) refers to human activity dedicated to production, involving physical or intellectual effort over time. Labor capacity can be improved through training, known as Human Capital. The final factor is Capital ($K$), specifically physical capital (buildings, equipment, and inventories), excluding financial capital.

Labor Market and Unemployment

Employment and unemployment are tracked through two main sources in Spain: the SEPE (State Public Employment Service) registry, which aims to provide social protection and job placement, and the EPA (Active Population Survey) conducted by the I.N.E. (National Statistics Institute). The EPA uses random sampling to estimate unemployment in an economic sense. The population ($16$ years or older) is divided into the Active Population (those supplying or available to supply labor) and the Inactive Population (those not seeking or available for work). Within the Active Population, there are:

1. Occupied/Employed: Persons aged $16$ or older who worked during the reference week, either for themselves or others.

2. Unemployed/Parados: Persons with the capacity and desire to work who cannot find a paid position.

Key labor market rates include the Activity Rate, the Employment Rate, and the Unemployment Rate. Unemployment is categorized by its cause:

• Frictional Unemployment: Due to sector mobility (people switching jobs).

• Structural Unemployment: Due to mismatches between labor supply and demand.

• Natural Rate of Unemployment (NAIRU): The "Non-Accelerating Inflation Rate of Unemployment." If unemployment falls below the NAIRU (U < \text{NAIRU}), labor becomes scarce, wages rise, and inflation accelerates. If unemployment is above the NAIRU (U > \text{NAIRU}), there is excess supply, and inflation moderates. A country reaching this rate is considered to be at "full employment."

• Cyclical Unemployment: Caused by economic downturns and fluctuations in the business cycle. When aggregate demand falls and pessimism spreads, firms reduce investment and production, leading to generalized, temporary job losses.

• Seasonal Unemployment: Tied to industries where demand varies by time of year, such as agriculture or tourism.

Total Unemployment is the sum of Natural and Cyclical unemployment.

The Production Possibility Frontier (PPF/FPP)

The PPF, or Transformation Curve, illustrates the maximum production a society can achieve given its current resources and technology. It highlights the concept of scarcity and the necessity of choice. If a society produces only two goods with a fixed labor resource, increasing the production of one must lead to a reduction in the other. Points on the frontier represent efficient production. Points inside the frontier represent inefficiency (underutilized resources), and points outside the frontier represent currently unattainable levels of production.

The slope of the PPF represents the Opportunity Cost: the amount of one good or service that must be sacrificed to obtain an additional unit of another. The PPF typically has a negative slope due to scarcity and a concave shape due to the Law of Diminishing Returns. This law states that adding successive units of a production factor (while others are held constant) yields progressively smaller increases in output. Consequently, the opportunity cost increases as more of a good is produced because resources must be transferred from where they are more efficient to where they are less efficient.

The PPF can shift outward (representing economic growth) through an increase in resources or technological progress. This shift can be parallel (affecting both goods equally) or pivoted (affecting only one good).

Economic Agents

Agents in the economy are grouped into three non-exclusive categories:

1. Households/Families (Economías Domésticas): Their functions are to consume and to offer their productive factors in exchange for income. Their goal is to maximize utility subject to their income constraints.

2. Firms (Unidades de Producción): Their function is to transform factors into goods and services. They aim to maximize profit by using technically and economically efficient methods. Technical Efficiency is achieved if a method produces the same output using less of at least one factor without using more of others. Economic Efficiency is choosing the technically efficient method with the lowest cost.

3. Public Sector/State: This includes all public administrations. Its objectives include consumer protection, market regulation, and coordinating economic policies for growth, stability, and full employment. It intervenes through legal attributes, direct consumption (it is the largest consumer), and fiscal tools such as public spending and public income (taxes).