econonic facts = data-> economic explanation = interpretation, or sense of understanding about economic facts as a whole
Aside from the study of allocation of scare resources, economics as a study stands out due to its conceptual framework used for the study of economic facts. This framework, or methodology, or paradigm is dominated by neoclassical, or marginalist branch, and topics inexplicable using this paradigm is generally considered 'non-economic'.
The Classical school of Smith, Ricardo, Marx explained the growth of productive capacity, gains from specialization and trade(comparatice advantage), etc. Due to its reliance on theory of value based on inputs(labor, capital, land), it could not explain the diamond-water paradox.
Beginning in the 1870s and onward came marginal analysis, solving this paradox with the concept of 'marginal utility' or value from scarcity, namely by Menger, Jevons, Walras, Marshall, Pareto, etc, to supplant the classical explanation of value theory. This paradigm, following Austrian School's doctrines, perceived value determined by consumer's tastes
This paradigm has been furthered by Hicks, Allen, Samuekson, etc, and saw its usefulness as well as limitations, which is central idea this book deals with.
1.2. the marginalist paradigm
positive economics is contrary to normative economics, which deals with what ought to be. the statement that the poor need/need not more subsidies is normative, while stating the effects of subsidies to poor is positive; thus, positive economics evades the political aspects of economics hampering conclusions.
economics as science can trace its roots back to social science, which studies human behavior, using in particular the paradigm of 'the theory of choice': each individual behavior is chatacterised by his/her choice, or decision. Along with the fact that researchers/the research is affected by the vested interests generated by the result of analysis, this property of social science regarding individual choice is distinguishing point from natural sciences where the observed phenomena are passively following the law of nature.
As intellectual beings, individuals choose, due to scare nature of resources at hand: time, effort, money, land, etc.
Although it is taken for granted, scarcity in fact is nothing but idea, generated to explain the fact that not supply is limitied for every good/service. (that not everyone owns/produces the same output at will.)
Scarcity also rests on individual preferences, which assumes the more, the better.
The Marginalist, or neoclassical analysis draws from the interaction of two classification of phenomena for the theory of choice.
:1. tastes, preferences
2. oppportunities, constraints
Based on this analysis, exchange of goods/service is fundamentally conditioned by:
1. system of laws within a society to abide by, which guarantees contracts and rights to facilitate exchange
2. the differing preferences of many individuals, the interaction of which enables exchange. Often, the analysis utilizes constant unmeasured variables(or diminished into error term) <despite the fact that economics studies changes based on changes in constraints
- the general trend and change in trend of car sales in US: big cars->economy cars (70s)->high performing cars(90s) cannot be explained by immutable love for American big cars; it's more the result of relatively cheap oil in US and changing oil price, respectively. Thus, change in tastes is not a factor of economic change. fads and fashion: due to diminishing marginal returns; the lower the cost, the more regular change of fad&fashion; likely, opportunity cost, present value, wage gap and such elements of the law of demand are used for analysis with constant tastes.>
3. individual behavior is purposeful, preferring more to less, maxi/minimizing through optimized behavior, based on specified constraints.
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