Economics, 3rd Edition

Theories 

Throughout this book we will look at theories. Theories can be used to explain something and 

to make predictions. The theory of indifference curves and budget lines can be used to explain consumer 

behaviour. Theories,  however,  can be developed separate to empirical research. In 1982, Nobel prize- 

winning economist, Wassily Leontif, lamented the lack of systematic empirical enquiry in economics at 

the expense of too much ‘theorizing’. Leontif (Leontif, W. (1982) Academic Economics. In Science 217: 

104–107) had looked at articles in the American Economic Review and observed that a large proportion 

of the articles contained models which were not supported by any data and analysed issues without sup-

porting data. In comparison, articles based on primary data generated by the author/s, or on secondary 

data and which used appropriate statistical tests to arrive at conclusions, represented the minority. Was 

it wise to base decisions or policy on the knowledge generated by research which was not subject to the 

rigours of empirical methods?

Theorizing on its own can be said to be a tradition in rationalist economics. Here, the economist uses 

logic, reason and induction to arrive at conclusions. Much of the logic might be based on assumptions 

which may not be subject to any supporting data. For example, the theory of consumer behaviour makes 

assumptions about the way human beings behave when making consumption decisions, such as con-

sumers act rationally, prefer more to less and make purchasing decisions based on pure self-interest.

Empiricist economics starts with observations and data from which models can be developed which 

reflect the data. These models can be used to arrive at conclusions and to make predictions. Observations 

of consumer behaviour suggest that humans do not act rationally when making purchasing decisions. 

Models can be developed which represent the data – how humans do behave as consumers – and these 

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CHAPTER 2  THINKING LIKE AN ECONOMIST  19

models can be used to generate theories which help make predictions about consumer behaviour in 

 different situations.

Even if the hypothesis is supported by the evidence this is not a reason for the economist to sit back 

and relax, happy in the knowledge they have found ‘the truth’. Things change, new information, experience 

or observations may be made which render the original hypothesis redundant and subject to revision or 

refinement; there is a process which is never ending.