The Economist as Scientist

The Scientific Method: Observation,
Theory, and More Observation
Isaac Newton, the famous 17th-century scientist and mathematician, allegedly
became intrigued one day when he saw an apple fall from a tree. This observation
motivated Newton to develop a theory of gravity that applies not only to an apple
falling to the earth but to any two objects in the universe. Subsequent testing of
Newton’s theory has shown that it works well in many circumstances (although,
as Einstein would later emphasize, not in all circumstances). Because Newton’s
theory has been so successful at explaining observation, it is still taught in undergraduate
physics courses around the world.
This interplay between theory and observation also occurs in the field
of economics. An economist might live in a country experiencing rapidly
increasing prices and be moved by this observation to develop a theory of
inflation. The theory might assert that high inflation arises when the government
prints too much money. To test this theory, the economist could collect
and analyze data on prices and money from many different countries. If
growth in the quantity of money were not at all related to the rate at which
prices are rising, the economist would start to doubt the validity of this
theory of inflation. If money growth and inflation were strongly correlated
in international data, as in fact they are, the economist would become more
confident in the theory.

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