ASSIGNMENT

ON
PARADIGMS IN ECONOMICS

SUBMITTED

TO

PROF E. REVATHI
(Dean, Division of Graduate Studies)

BY
SHEKHAR NAIDU
PhD Student

CENTRE FOR ECONOMIC AND SOCIAL STUDIES

Hyderabad
1. What is Axiom of Human Action (Praxeology)?

Mises's "axiom of action" the proposition that humans act is a true synthetic a priori
proposition. The proposition that humans act cannot be refuted, since such a denial would
itself qualify as an action; the truth of the statement cannot be undone. There are two main
branches of the sciences of human action: praxeology and history.

History is the collection and systematic arrangement of all the data of experience
concerning human action. It deals with the concrete content of human action. It studies all
human endeavours in their infinite multiplicity and variety and all individual actions with all
their accidental, special, and particular implications.

In the field of human history a limitation similar to that which the experimentally tested
theories enjoin upon the attempts to interpret and elucidate individual physical, chemical, and
physiological events is provided by praxeology.

Praxeology is a theoretical and systematic, not a historical, science. Its scope is human
action as such, irrespective of all environmental, accidental, and individual circumstances of
the concrete acts. Its cognition is purely formal and general without reference to the material
content and the particular features of the actual case. It aims at knowledge valid for all
instances in which the conditions exactly correspond to those implied in its assumptions and
inferences. Its statements and propositions are not derived from experience.

They are, like those of logic and mathematics, a priori. They are not subject to check or
misrepresentation on the ground of involvement and actualities. They are both legitimately
and transiently precursor to any cognizance of verifiable actualities. They are a necessary
requirement of any intellectual grasp of historical events. Without them we ought not to have
the capacity to find throughout occasions whatever else than vivid change and disordered
tangle.

In brief, praxeology consists of the logical implications of the universal formal fact that
people act, that they employ means to try to attain chosen ends. Technology deals with the
contentual problem of how to achieve ends by adoption of means. Psychology deals with the
question of why people adopt various ends and how they go about adopting them. Ethics
deals with the question of what ends, or values, people should adopt. And history deals with
ends adopted in the past, what means were used to try to achieve them and what the
consequences of these actions were. Praxeology or economic theory in particular, is thus a
unique discipline within the social sciences; for, in contrast to the others, it deals not with the
content of men's values, goals, and actions not with what they have done or how they have
acted or how they should act but purely with the fact that they do have goals and act to
attain them.

2. Explain Von Misess Methodological Dualism.

Methodological dualism is an epistemological position which holds that it is

necessary, based on our current levels of knowledge and understanding, to utilize a different
methodology in our attempts to analyze the actions of human beings than the methodology
used in the physical sciences (i.e. physics, biology etc...) to study external events. This
position is based on the presupposition that humans differ fundamentally from other objects
in the external world in that humans act, or in other words use and choose means to achieve
their subjectively chosen ends, while other objects in nature, such as stones, planets,
molecules and atoms do not. Furthermore, we do not at present know how external events
affect an individual's "thoughts, ideas, and judgements of value" and this ignorance forces us
to adopt a dualistic approach to the two classes of phenomena.

This view was emphasized by Ludwig von Mises and formed the central basis of his
epistemology. Methodological dualism, especially in Mises's case, was a reaction to the
notion held by groups such as the logical positivists that the study of human action, and as
such economics, should utilize the same experimental scientific method as the physical
sciences, a view that has been referred to by Mises, Friedrich Hayek and others as scientism.
The alternative methodology that Mises developed and utilized for his study of human action
was praxeology, which formed the basis for his work in economics. Praxeology differs from
the mainstream neoclassical approach to economics, in that the mainstream approach utilizes
the same overall methodology as the physical sciences in an attempt to develop economic
theories and predict future economics.

Misess methodological dualism established the framework for his apriorism. If

historicists are wrong and economic laws are indeed evident and can be understood through
scientific investigation, what must follow? And, if the positivists are wrong and the methods
of the natural sciences are ill-suited to elaborate the laws of economics, what method must
economics follow? In response to this question Mises, like Kant, uses the notion of (a) a
priori axioms and logical categories of the human mind that are (b) known to individuals
through a process of introspection, which (c) act as the means through which we understand
the world, and then applies this idea to the science of economics.

3. Explain the Behavioural Economics concepts.

Behavioural economics is an umbrella of approaches that seek to extend the standard

economics framework to account for relevant features of human behaviour that are absent in
the standard economics framework. Typically, this calls for borrowing from the neighbouring
social sciences, particularly from psychology and sociology. The emphasis is on well-
documented empirical findings: at the core of behavioural economics is the conviction that
making our model of an economic man more accurate will improve our understanding of
economics, thereby making the discipline more useful.

Traditionally, economists have made no distinction between the behavioural and welfare
components of economic models. Such a distinction has not been necessary because standard
welfare analysis is grounded in the doctrine of revealed preference.

Interest in behavioural economics has been stimulated by accumulating evidence that the
standard model of consumer decision-making provides an inadequate positive description of
human behaviour for some questions. According to the evidence (and contrary to the standard
economic model), individuals are bounded in many dimensions, in particular in their
rationality, self-control and self-interest.

Bounded rationality refers to incomplete information processing ability. Individuals

appeal to heuristics and rules of thumb when making their decisions. They make biased
probability judgments and are often overconfident. Moreover, individuals tend to anchor to
seemingly irrelevant information or to the status quo, and they are loss aversive.

Behavioural economists have proposed a variety of models that raise difficult issues
concerning welfare evaluation. No consensus concerning appropriate standards and criteria
has yet emerged. Broadly speaking, there are two main schools of thought.

One school of thought insists on strict adherence to the doctrine of revealed preference for
the purpose of economic policy evaluation. This perspective maintains the tight
correspondence between the behavioural and welfare components of economic models.

The second school of thought holds that behavioural economics can in principle justify
modifying, relaxing, or even jettisoning the principle of revealed preference for the purpose
of welfare analysis. A number of possibilities have been explored. If an individuals choices
reveal several distinct sets of mutually inconsistent preferences, then normative evaluation
may require the adoption of a particular perspective.

4. What is the epistemology of Econometrics?

Epistemology is the theory of knowledge, especially with regard to its methods, validity,
and scope, and the distinction between justified belief and opinion. Econometric
epistemology refers to the methods, scope and philosophy of econometrics.

The application of statistical and mathematical methods to analysis of economic data,

with a purpose of giving empirical content to economic theories and verifying them or
refuting them.

The history and methodology of econometrics has attracted growing attention in recent
years. This development has taken place within the context of the emergence of a wider
interest in economic methodology. The large volume of recent literature (such as Blaug,
1980, Caldwell, 1982 and OSullivan, 1987) which attests to the latter phenomenon has
dispelled what Blaug (1987, p. xi) terms ... the traditional antipathy of economists to any
and all questions of methodology. Reflecting this shift, the traditional neglect of
methodological issues in econometrics (noted by Pagan, 1987, pp. 3-4) has increasingly
given way to explicit methodological debate. Simultaneously, the historical development
of econometrics has emerged as a topic of investigation for historians of economic
thought. These two advances have combined to promote a greater intellectual self-awareness
within econometric discourse

Econometrics is based upon the development of statistical methods for estimating

economic relationships, testing economic theories, and evaluating and implementing
government and business policy. The most common application of econometrics is the
forecasting of such important macroeconomic variables as interest rates, inflation rates, and
gross domestic product. Whereas forecasts of economic indicators are highly visible and
often widely published, econometric methods can be used in economic areas that have
nothing to do with macroeconomic forecasting. For example, we will study the effects of
political campaign expenditures on voting outcomes. We will consider the effect of school
spending on student performance in the field of education.
 Econometrics has evolved as a separate discipline from mathematical statistics because
the former focuses on the problems inherent in collecting and analyzing non-experimental
economic data. Non-experimental data are not accumulated through controlled experiments
on individuals, firms, or segments of the economy. (Non-experimental data are sometimes
called observational data, or retrospective data, to emphasize the fact that the researcher is a
passive collector of the data.) Experimental data are often collected in laboratory
environments in the natural sciences, but they are much more difficult to obtain in the social
sciences

5. Write about Happiness Index

Coined in 1972 by Bhutans fourth king Jigme Singye Wangchuck, Gross National
Happiness refers to the nations policy of balancing modernity with preservation of traditions,
mostly by resisting laissez-faire development (Wall Street Journal, 2013).1 The concept
implies that sustainable development should take a holistic approach towards notions of
progress and give equal importance to noneconomic aspects of wellbeing.2 Its four pillars
have often explained the concept of GNH: good governance, sustainable socio-economic
development, cultural preservation, and environmental conservation. The four pillars have
been declassified into nine domains in order to create widespread understanding of GNH and
to reflect the holistic range of GNH values.

The nine domains are: psychological wellbeing, health, education, time use, cultural
diversity and resilience, good governance, community vitality, ecological diversity and
resilience, and living standards. Furthermore, the nine domains together comprise 33
clustered indicators, each one of which is composed of several variables. When unpacked, the
33 clustered indicators have 124 variables. Each domain represents components of wellbeing
of the Bhutanese people, and the term wellbeing refers to fulfilling conditions of a good
life as per the values and principles laid down by the concept of Gross National Happiness.

Legally stating the Constitution of Bhutan (2008, Article 9) directs the State to
promote those conditions that will enable the pursuit of Gross National Happiness (Karma
Ura et all, 2013). In other words, if the government cannot create happiness for its people,
there is no purpose for the government to exist. After the establishment of a constitutional
monarchy in 2008 and the coronation of the Fifth King, the Government of Bhutan is legally
obliged to specify this objective such that policies and programmes advanced by the new
democracy continue to be coherent with it. In principle,
 GNH seeks to be policy-sensitive changing over time in response to public action.
Its indicators try to reflect public priorities directly.
It tries to address the strengthening or deterioration of social, cultural, and
environmental achievements whether or not they are the direct objective of policy.
GNH indicators are carefully chosen so that they stay relevant in future periods as
well as at the present time in order to measure progress across time and
Finally, the GNH Index consists of sub-group consistent hence decomposable by
regions and groups.

Domains of GNH: Talking about the domains, there are 9 domains of 2, 3 or 4 indicators.

Domain Indicators
Psychological wellbeing 4
Health 4
Time use 2
Education 4
Cultural diversity and resilience 4
Good Governance 4
Community vitality 4
Ecological diversity and resilience 4
Living standards 3
Total 33

Weights of the 33 indicators, Source - (Karma Ura et all, 2013)

 Not surprisingly, any measure of GNH is going to be rife with estimates. Things like
the depletion of environmental resources, for example, are impossible to determine with
accuracy. Other aspects, such as spiritual or cultural growth can only be measured by
subjective, rather than objective, means.

As future economists work with the core values of GNH, new measures should allow
investors to more accurately view the long-term effects not only of economic growth, but also
the depletion of natural resources and the overall well-being of citizens. Green economics
shares the same ideology and many of the same values as GNH creators and proponents.

6. What are Randomized Experiments?

In the statistical theory of design of experiments, randomization involves randomly

allocating the experimental units across the treatment groups. For example, if an experiment
compares a new drug against a standard drug, then the patients should be allocated to either
the new drug or to the standard drug control using randomization.

Randomization of treatment in clinical trials poses ethical problems. In some cases,

randomization reduces the therapeutic options for both physician and patient, and so
randomization requires clinical equipoise regarding the treatments.

Randomized Experiment or Randomized controlled trial (RCT) is a type of scientific

(often medical) experiment which aims to reduce bias when testing a new treatment. The
people participating in the trial are randomly allocated to either the group receiving the
treatment under investigation or to a group receiving standard treatment as the control.
Randomization minimises selection bias and the different comparison groups allow the
researchers to determine any effects of the treatment when compared with the no treatment
(control) group, while other variables are kept constant.

The RCT is often considered the gold standard for a clinical trial. RCTs are often used
to test the efficacy or effectiveness of various types of medical intervention and may provide
information about adverse effects, such as drug reactions. Random assignment of intervention
is done after subjects have been assessed for eligibility and recruited, but before the
intervention to be studied begins.

Random allocation in real trials is complex, but conceptually the process is like
tossing a coin. After randomization, the two (or more) groups of subjects are followed in
exactly the same way and the only differences between them are the care they receive. For
example, in terms of procedures, tests, outpatient visits, and follow-up calls, should be those
intrinsic to the treatments being compared. The most important advantage of proper
randomization is that it minimizes allocation bias, balancing both known and unknown
prognostic factors, in the assignment of treatments.

The terms "RCT" and randomized trial are sometimes used synonymously, but the
methodologically sound practice is to reserve the "RCT" name only for trials that contain
control groups, in which groups receiving the experimental treatment are compared with
control groups receiving no treatment (a placebo-controlled study) or a previously tested
treatment (a positive-control study).

The term "randomized trials" omits mention of controls and can describe studies that
compare multiple treatment groups with each other (in the absence of a control group).
Similarly, although the "RCT" name is sometimes expanded as "randomized clinical trial" or
"randomized comparative trial", the methodologically sound practice, to avoid ambiguity in
the scientific literature, is to retain "control" in the definition of "RCT" and thus reserve that
name only for trials that contain controls. Not all randomized clinical trials are randomized
controlled trials (and some of them could never be, in cases where controls would be
impractical or unethical to institute).