# What is an Inductive Method in Economics?

## Meaning

Inductive reasoning is the widely accepted method in economics for deriving conclusions. As you know, economics is a social science that deals with the economic activities of people. Hence, formulating a theory in economics is a tedious job as there is no possibility for economists to carry out controlled experiments that happen in the laboratories of physical and natural sciences. In this case, economists make generalizations based on statistical data. For example, the only way to study the spending habits of a particular society is to collect the spending data of each individual. After analyzing those data, you can make generalizations about the spending habits of the society. This process is known as inductive reasoning. As you notice here, induction moves from a part to the whole.

## Stages of Inductive Method

Inductive method is popularly referred to as the historical, empirical or ‘a posteriori’ method of economic analysis. Need not say; when you employ inductive method in your analysis, you need to collect relevant statistical data. These statistical data serve as the basis for generalizations. Therefore, inductive method involves the following stages:

- The first stage is to collect statistical data relevant to your problem. There should not be any place for bias or prejudice.
- The second stage is to analyze the statistical data using appropriate statistical technique and arriving at conclusions.
- The third stage is to generalize your conclusions for the entire population.

The stages of inductive method need not be in the same order as mentioned here. The procedures totally depend upon the nature of your research and vary from researcher to researcher.

## Types of Inductive Method

There are two types of inductive method, namely experimental method and statistical method.

**Experimental Method**

Experimental method is helpful to validate the laws or generalizations obtained using the deductive method. Suppose there is a generalization based on deductive method. Under experimental method, the researcher collect statistical data to validate the generalization. Though the experimental method is indispensable in physical and natural sciences, it has limited scope in economics as the economic world include unpredictable human behavior. This does not mean that this method is of no use for economic investigations. Experimental method, however, plays a modest role in economic research.

**Statistical Method**

Statistical method is slightly different from the experimental method. Under statistical method, the researcher collects the statistical data first. Then he or she analyzes the data and makes generalizations. Hence, this method is helpful to frame generalizations based on statistical data collected from various sources. Statistical induction is more popular among researchers to figure out the cause and effect relationship between variables. Conclusions made from statistical induction is more accurate and helpful in framing government policies.

## Pros of Inductive Method

*The following are the important advantages of inductive method:*

1. The inductive approach can be employed to verify the conclusions of economic theory formulated by the deductive method.

2. The findings attained by inductive reasoning are typically examined based on data. These outcomes are essential in framing government policies in numerous areas. Because inductive procedures substantially work with statistical tools, there is the potential for accomplishing results that are nearer to reality. Furthermore, while the sample size increase, the exactness of the outcome improves.

3. The generalizations arrived through this approach tend to be more trustworthy compared to those of the deductive method. The empirical research minimizes the discrepancy between theory and practice. The adoption of the inductive method has bestowed some fundamental laws in economics. For instance, the study of family budgets resulted in the composition of Engel’s law of consumption, which claims that when income rises, the proportion of income spent on food item decreases.

4. Inductive method is advantageous in inspecting the changing phenomena of economics.

## Cons of Inductive Method

1. The technique of induction is complicated and time-consuming in nature. It is extremely challenging for newbies to gather data, examine them and obtain some sensible conclusions from them.

2. The recommendations produced through this approach are driven by the information gathered by investigation. If the investigator bears some moral or ideological predilections of his own, the inductive method could lead to prejudiced conclusions.

3. On many occasions, the inductive method is inapplicable because of the plurality of causes and inter-mixture of results.

4. Because the recommendations attained with this technique are on the basis of a few facts, the universal application cannot be very much legitimate.

5. It happens to be an expensive process because collection of data and an analysis of them involve significant investment.

**© 2012 Sundaram Ponnusamy**