Most of our marcoeconomic understanding and initutions are based mainly on associations. Economy is complex and its needs even far more efforts than medical science for digging out causal mechanism.
How then does theorectical underpining help in a better understanding of the scope of economy problems
There is theoretical basis for economic research. One needs to understand the assumptions under which this or that model is built. For example, in macroeconomic growth models (see, for example, the book of Barro and Sala-i-Martin, 1995) the major assumptinos are: a) countries are self-finanicing growth (no debt), b) there are 2 factors of production (labor and capital, sometimes human capital is added), c) there is future discount, d) the output is split into investment and consumption, e) agents are rational and maximize the integral of discounted utility flow. Further, model can be calibrated using the data for GDP dynamics of several countries.
Intuition becomes important at later stages, when researcher knows many models with different assumptions.
Dear Onwe,
Precisely because of the complexity involved one needs to have theoretical bases. As in the hard sciences, economists are trying to find “empirical regularities” imitating the Kepler stage of research in celestial mechanics, and afterwards to find “fundamental laws” imitating the Newton stage of research.
For Karl Popper, they can approach positively through “conjectures and refutations”. What is important is that the model predictions and explanations are not falsified. Even in that methodology one has the choice of making realistic assumption, or even to stand with Milton Friedman who held that since only prediction matters, then realistic assumptions do not matter. Alternatively, one can choose a method based on beliefs, such as Kuhnian’s paradigm or Lakatosian’s Methodology of Scientific Research program.
There are some models that starts from a given reality and consider connections and association that makes them understandable to a great number of people. The Keynesian model associated consumption, investment and liquidity preferences to explain the Great Depression. One can also look at the monetarist model from that point of view. Those models did not predict well, which lead research further into Rational Expectation and Artificial Intelligence models in the modern era.
THEORY IN SOCIAL SCIENCE such as economics is not written in stone; it serves as a reference point and must be modified or adjusted according to context. Without theory we will walk into a blind allay; with it, we have a guiding light- - -albeit it at times quite dim, we find find our way through the alley.
IN CONTRAST TO NATURAL SCIENCE that deals with fixed or predictable phenomena, economics deals with human behavior. A such no theory should be seen as dead letters. A good theory should be one that is "general" enough to explain many situation, but not too broad so as to lose its power to explain. It should not be too narrow so as to loose its ability to generalize and degenerate to nothing more than a conclusory assertion of a case study. We may not be able to predict with great accuracy in economics- - - if we do, we would be able to avoid economic or financial crisis- - -theories in this field nevertheless guide us through many crucial moments in human development, i.e. Industrial revolution 1, 2, 3 and now 4.