Economics as a Social Science: Object, Method, and Analytical Approaches

The Evolution and Classification of Economic Science

Since the appearance of man on Earth, the human species has faced a relentless daily challenge: survival. To achieve this goal, individuals and collectives have dedicated a significant portion of their energy to extracting from Nature what they need for sustenance. Consequently, the tasks of procurement, production, and distribution of goods and services have become essential aspects of human behavior. To investigate, understand, and improve this facet of human behavior, civilizations throughout history have analyzed such actions and accumulated knowledge about them.

Before the emergence of formal economic science, the collection of economic knowledge was defined as an "empirical art." Its primary purpose was to provide rulers with practical rules to solve specific problems. It was not until relatively recently—specifically the mid-18th century—that this vast corpus of knowledge and experience was formally established as an independent field of human knowledge known as Economic Science.

A fundamental question arises: if this area of activity is so essential, why did it take so long for humans to systematize this knowledge scientifically? The American economist Robert L. Heilbroner, in his work The Worldly Philosophers (Spanish title: Vida y Doctrinas de los grandes economistas), offers a concise and powerful explanation. He notes that until the Industrial Revolution in the 18th century, civilization did not feel the need to model human economic behavior. This was because economic decisions were primarily based on either "the whip" (imposition and force) or custom and tradition. Therefore, there was no requirement to construct scientific models to understand the mechanisms of economic behavior to improve societal functioning.

Defining the Scope and Nature of Economics

Etymologically, the term "economy" derives from the Greek words oikos (house) and nomos (government or administration). Alongside sociology, political science, anthropology, and psychology, economics belongs to the group of social sciences, as they all attempt to explain different aspects of society. While they share this common link, economics differs from the other social sciences in the specific problems it studies and the methods it employs.

There is no single consensus on the definition of economic science, as its object of study is so broad. Different schools of thought and authors emphasize different aspects. In its initial historical phase, mercantilists and classical economists such as Adam Smith, David Ricardo, and John Stuart Mill defined economics as the "science of wealth." Later, economists belonging to the Austrian Marginalist School, such as Carl Menger and Friedrich von Wieser, highlighted that resource scarcity is the fundamental characteristic of economics.

Two of the most frequently used definitions in contemporary study include:

1. The definition by Professors Rudiger Dornbusch and Stanley Fischer, which bases the notion of economics on the science's attempt to answer three societal questions: What goods and services should be produced? How should they be produced? For whom should they be produced?

2. The definition proposed by Lionel Robbins, which is the most widely used in modern manuals: "The science which studies human behavior as a relationship between ends and scarce means which have alternative uses." This definition highlights several key keys: the relative scarcity of means compared to unlimited human needs, the choice between alternatives (leading to the concept of opportunity cost), and the necessity of prioritizing different goals.

Analytical Approaches: Positive vs. Normative and Micro vs. Macro

Economic science can be classified within the broader context of human knowledge as an empirical and social science. It is empirical because it is based on experience and observation. Because the field is so vast, it is further divided into specific branches based on objectives and focus.

One primary distinction is between Positive Economics and Normative Economics. Positive Economics seeks objective explanations of how the economy functions and deals with "what is." In contrast, Normative Economics offers prescriptions and recipes based on personal and subjective value judgments, dealing with "what should be." Although this is a formal distinction, in the real world, they are intimately related; one cannot discuss what should be done without first understanding the economic phenomenon in question.

Positive Economics is further divided into two major fields based on the subject addressed:

1. Microeconomics: Derived from the Greek mikros (small), it studies individual economic agents such as families, firms, and governments. It focuses on matters like optimal consumer behavior, how a firm maximizes profit, and the formation of prices and production in specific markets.

2. Macroeconomics: Derived from the Greek makros (large), it studies the overall economic environment in which individual agents operate. It addresses aggregate issues such as the level of national income, interest rates, and employment levels.

It is a procedural error to consider macroeconomics and microeconomics as completely separate entities. They are always interrelated; microeconomic analysis often requires a macroeconomic context, and vice versa.

The Scientific Method and Variables in Economics

The goal of economic science is to understand how the economy works and to express that knowledge through laws and explanatory theories. In science, a "Law" describes universal phenomena that occur regardless of historical, geographical, or cultural context. A "Theory" refers to a scientific framework describing processes within a specific context. Because economic behavior is mediated by historical and social circumstances, there are very few universal laws in economics (e.g., the Law of Supply and Demand); instead, economic knowledge is primarily supported by theories.

Economic theory is essential because, without it, economists could only describe what they see. With theory, they can understand mechanisms and make effective decisions. Economists use theories to build econometric models, which are simplifications of reality. These models use hypotheses and assumptions to infer the behavior of a dependent variable (endogenous) based on known data (exogenous variables).

Scientific research in economics employs two main methods:

1. Inductive Method: Moving from the observation of reality to the derivation of general principles.

2. Deductive Method: Based on logical deductions from a priori axioms without necessarily recurring to empirical observation. A classic example is the syllogism: "all men are mortal; Socrates is a man; therefore, Socrates is mortal."

In economics, these methods are combined in a three-stage process: first, the phenomenon is observed (induction to find hypotheses); second, hypotheses are formulated and a theory is developed; third, the theory's predictions are verified or contrasted against data (deduction to formulate laws which are then tested).

Quantitative Analysis: Indices and Percentage Variations

Economic variables are indicators, usually numerical, of economic phenomena (e.g., production, prices, income, interest rates). To analyze these, economists use raw data in its original format (e.g., euros, kilograms, percentages) or in elaborated forms such as index numbers and growth rates.

Index Numbers are used to compare data against a specific point in time (the base period). The base period is assigned an index value of 100. The formula for an index is:

$\text{Index} = \frac{\text{Data}_t}{\text{Data}_{\text{base}}} \times 100$

For example, if the price of a good was $250$ in 1998 (base year) and rose to $325$ in 1999 and $500$ in 2000, the indices would be:

$\text{Index 1998} = \frac{250}{250} \times 100 = 100$

$\text{Index 1999} = \frac{325}{250} \times 100 = 130$

$\text{Index 2000} = \frac{500}{250} \times 100 = 200$

Percentage Variations (Rates) allow for the comparison of variables measured in different units and determine the change between two periods. The formula is:

$\text{Percentage Variation} = \frac{\text{Data}_t - \text{Data}_{t-1}}{\text{Data}_{t-1}} \times 100$

Because the data from the period prior to the first entry is unknown, information for the first period's rate is always lost. For example, if steel consumption went from $1268$ in 1996 to $1324$ in 1997, the percentage variation for 1997 is $4.4 \%$.

Types of Economic Data and Variables

Data can be presented in three formats:

1. Time Series: Measurements of a variable at different points or intervals of time (days, months, years). For example, a table showing tank production from 1990 to 2000.

2. Cross-sectional Data: Information about a variable at a single moment in time but differing by the source or informant. For example, the average salaries of different professions in the year 2000 (Lawyer: $2,000\,\text{€}$, Economist: $2,250\,\text{€}$, Engineer: $3,000\,\text{€}$, Psychologist: $1,800\,\text{€}$).

3. Panel Data: A mixture of time series and cross-sectional data, providing the most complete information.

Variables are classified based on several criteria:

• Relations in a Model: Endogenous (determined within the model) vs. Exogenous (external to the model).

• Temporal Period: Stock Variables (referring to a specific moment, like population or wealth) vs. Flow Variables (referring to a period of time, like income or investment).

• Inflation considerations: Nominal (current prices) vs. Real (constant prices). Real variables are calculated by "deflating" nominal variables to remove the distortion of price changes:

$\text{Real Variable} = \frac{\text{Nominal Variable}}{\text{Price Level Index}}$

• Measurability: Extensive variables (measurable) vs. Intensive variables (impossible to measure directly, such as utility).

Societal Resources and the Satisfaction of Needs

The ultimate ideal governing human behavior is the achievement of happiness, which requires satisfaction in both spiritual and material realms. Economics focuses on the material aspect. Individuals satisfy material needs through the consumption of goods and services. These needs are characterized as being unlimited and dynamic (evolving as society changes).

Resources used to satisfy these needs are limited, which makes the concept of scarcity fundamental to economics. Scarcity is a relative term and is not synonymous with poverty. The economic process involves taking resources (factors of production or inputs), converting them through a production process (firms), and resulting in goods and services (outputs).

Goods are classified by nature:

1. Consumer Goods: Acquired by families. These can be perishable or durable (e.g., housing).

2. Capital Goods: Acquired by firms to be used in the production process.

Factors of Production: Land, Labor, and Capital

Production requires physical inputs, classified into three categories:

1. Natural Resources: Raw materials provided by nature, including land, water, and minerals. These are divided into renewable (restored by nature, like water) and non-renewable (exhausted upon use, like oil).

2. Labor: Human activity dedicated to production, measured in time (e.g., man-hours). Productivity can be improved through training, creating "Human Capital."

3. Capital: Specifically physical capital (excluding financial capital like stocks). It refers to produced goods used to produce other goods. This includes structures (buildings), equipment (machinery), and inventory (raw materials and products in progress).

Analyzing Labor Markets and Unemployment Types

In Western countries, labor statistics typically come from two sources: administrative registers (like SEPE in Spain) and labor market surveys (like the EPA conducted by the INE). These sources often differ because they measure different concepts. The population is divided into:

• Active Population: People aged 16 or older who provide labor or are available and seeking work. This includes the Employed (working for others or self-employed) and the Unemployed (those able and willing to work but unable to find it).
• Inactive Population: People aged 16 or older who only consume (retirees, students, homemakers).

Key labor market rates include:

$\text{Activity Rate} = \frac{\text{Active Population}}{\text{Population 16-65}} \times 100$

$\text{Occupation Rate} = \frac{\text{Employed}}{\text{Active Population}} \times 100$

$\text{Unemployment Rate} = \frac{\text{Unemployed}}{\text{Active Population}} \times 100$

Unemployment is categorized by cause:

• Frictional: Temporary unemployment due to sectoral or geographic mobility (e.g., moving between jobs).
• Structural: Caused by a mismatch between labor supply and demand (e.g., declining industries). Frictional and structural unemployment together form the "Natural Rate of Unemployment."
• NAIRU: The Non-Accelerating Inflation Rate of Unemployment. If unemployment falls below this, the economy "overheats," leading to wage increases and inflation.
• Cyclical: Caused by fluctuations in the economic cycle, specifically during recessions when aggregate demand drops.
• Seasonal: Occurs in sectors with varying demand throughout the year, such as tourism or agriculture.

The Production Possibilities Frontier (PPF) and Opportunity Cost

The Production Possibilities Frontier (PPF) or Transformation Curve shows the maximum production a society can achieve given its resources and technology. For a simplified economy producing two goods (e.g., wheat and cannons) with a fixed amount of labor, any increase in one good requires a reduction in the other.

• Efficiency: Points on the PPF represent efficient production. Points inside the curve (e.g., Point Y) are inefficient. Points outside (e.g., Point Z) are unattainable with current resources.
• Opportunity Cost: The cost of a good is the amount of other goods that must be given up to obtain it. Graphically, this is the slope of the PPF, also known as the Marginal Rate of Transformation (MRT):

$\text{MRT}_{\text{Wheat/Cannons}} = \frac{\Delta \text{Wheat}}{\Delta \text{Cannons}}$

As more of a good is produced, the opportunity cost typically increases. This results in a PPF that is concave to the origin, justified by the Law of Diminishing Returns: as successive units of a factor are added, the additional output produced eventually decreases. If technology improves or resources increase, the PPF shifts outward (economic growth).

The Economic Agents: Families, Firms, and the Public Sector

Society consists of three non-exclusive categories of economic agents:

1. Households/Families: They consume goods and offer factors of production (land, capital, labor) in exchange for income (rent, interest, wages). Their goal is to maximize utility subject to their income constraints.

2. Firms: Their function is to transform inputs into goods and services. They seek Technical Efficiency (using the least amount of factors for a given output) and Economic Efficiency (choosing the technically efficient method with the lowest cost). Their fundamental objective is the maximization of profit.

3. The Public Sector (State): In Spain, this includes Central, Autonomous, and Local administrations, as well as public companies (e.g., ADIF, AENA, ICO). Its goal is the common good. The State intervenes by setting legal rules, acting as a major consumer, and directly intervening through Public Spending (current, investment, transfers) and Public Income (primarily taxes).