Article S8.13 Explaining Economic Phenomena Seminar Leader: Kunal Sen Professor of Development Economics and Policy, Institute for Development Policy and Management, The University of Manchester, UK Kunal.Sen[at]manchester.ac.uk This seminar went into the basic building blocks of economic research. Using the recent global financial crisis (GFC) of 2008-2009 as a common theme, the seminar leader introduced a number of key ideas in economic research methodology. The basic distinction between microeconomics and macroeconomics was introduced by citing the American singer Bob Dylan’s 1962 song, A Hard Rain’s A-Gonna Fall. What Dylan meant by “hard rain” has been a topic of popular discourse. Dylan has denied that it referred to nuclear fallout. Sen chose this song to refer to the GFC because the crisis has been like a hard rainfall, affecting almost the entire globe. Though its effects have been felt most noticeably in the developed countries, it has also affected many developing and underdeveloped countries. Because of this global effect, it may be understood and explained through macroeconomic concepts and theories. It has affected economies of the entire world at an aggregate level, in various ways. Its exact effect on the world economy still remains unclear. While, macroeconomics focuses on economic aggregates (such as regional-level or country-level economic performance), microeconomics focuses on individual parts of the economy (such as individual persons and firms). However, this distinction is not always so sharp. A particular economic variable may be utilised as a microeconomic or macroeconomic variable depending upon the level of analysis. The GDP of Orissa state, for example, may be considered a microeconomic variable when one compares it with India’s GDP. But the same GDP of Orissa may be considered a macroeconomic indicator while analysing GDP for the districts of Orissa. Micro- and macro-level forces interact with each other. For example, while the GFC (considered as a macroeconomic phenomenon) has adversely affected national economies worldwide, country-level economic policies (considered as macroeconomic variables for the global economy) have also contributed to the global meltdown. To discuss the character of this interaction, one needs to have a general picture of how economic systems function. In the field of economics, there is no one general picture that is commonly accepted. On the contrary, there are different schools of thought. The two major schools of thought in economics are: (a) classical economics (includes the works of Adam Smith and David Ricardo) and (b) neoclassical economics (includes Keynesian economics). There is a major difference in the way these schools of thought view the most ubiquitous component of an economic system: the market. Neoclassical economists are of the view that markets are self-sufficient and work independently according to the forces of demand and supply. On the other hand, classical economists believe that markets cannot be self-sufficient and cannot function independently; regulators are necessary to regulate the market. Different economists see the same economic situation differently. For example, some economists may view unemployment (a macroeconomic indicator of a national economy) as a market-driven phenomenon whereas others may view it as an outcome of economic policies. Economics is not an exact science. Therefore considerable premium is placed on clarity in the use of economic concepts and models, so as to avoid any misunderstanding. Use of models is very common in economics research. A model refers to how a set of concepts are related to each other. For example, a macroeconomic model may specify how GDP is related to other concepts, such as private consumption, gross investment, government spending, exports, imports, and so on. Economists frame models or theories and then try to support these though empirical data. A researcher may construct one’s own model based on one’s own concepts, or use an existing model and build on it. Even if one develops and uses a unique model, one should be able to demonstrate its relationship with existing models, for the purpose of comparison. Researchers are expected to be explicit about their models and maintain a critical stance vis-à-vis their validity and accuracy. Blind faith in a model is not welcome in research. The key challenge of being a researcher is to be ever willing to revise or replace one’s model on the basis of empirical evidence. Research is like an open-ended conversation, as it were, with the empirical world. Reported by Gopikant Panigrahy, with inputs from Banikanta Mishra; edited by D. P. Dash. [February 15, 2011] Copyleft Xavier Institute of Management, Xavier Square, Bhubaneswar 751013, India Research World (ISSN 0974-2379) http://www1.ximb.ac.in/RW.nsf/pages/Home | ||
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