5 MAJOR LIMITATIONS OF

ECONOMICS
There is a need to redress the balance
and point out the Major limitations of
Economics. They are as follows -
1] ECONOMICS IS DIFFICULT :-
Economics is difficult.In Maths,2+2=4
always.But in Economics,it depends on
countless variables,almost too difficult to
take into account.eg-Money supply &
Inflation.The quantity theory of money
MV=PY says there is a correlation between
Money supply & Inflation(as non-
economists say- if you print money you’l
cause inflation).But in practice,the growth
of Money supply is influenced by so many
variables(tech changes,velocity of
circulation,consumer behaviour,etc.)that
M3 growth statistics became almost
meaningless.
*MV=PY is great only in theory.
2] DIFFICULTY IN FORECASTING THE FUTURE :-
Its difficult to forecast the future,yet in
Economic policy-making,it becomes
important.In May,07’-how many
economists predicted a 25% fall in UK
house prices & the deepest recession
since war?Certainly not the treasury
economists,who were predicting stable
growth of 2% & a reduction in the Govt's
borrowing.Ofcourse,the people predicting
a house price collapse have been proved
right(Though some predicted it back in the
year 2000 itself).
3] DIFFICULTY IN KNOWING WHERE YOU ARE :-
One great challenge is knowing the
Current state of Economy.eg-China's
Growth & Unemployment figures are
always viewed with suspicion.There is a
debate about US Inflation
rate.Recently,the US GDP statistics were
revised,which means-the Economy was in
recession much earlier than previously
thought.How can we make a good policy
when we dont even know the past
occurances?Predicting the future is far off.
4] USING OLD MODELS :-
This recession is unusual & wasnt
preceded by an inflationary boom.The
Govt felt-as long as inflation is under
control,the Economy must be
sustainable.The mistake-To ignore an
Asset & Lending bubble.The problem-We
cant completely rely on Previous
experiences.As Economy develops,Old
models become less relevant.
5] IDEOLOGY :-
A good economist is free from Ideology &
is willing to revise theory,in light of
Empirical evidence that doesnt match his
Beliefs.In reality,many dislike evidence
that doesnt agree with their
Opinion.eg1)Some economists hold great
faith in Free market & assume that they
increase Economic Welfare,but there are
Exceptions.We cant conclude that Free
markets are Good/Bad.Each should be
evaluated Case-by-Case.eg2)Most
economists say-Free trade is
beneficial.This doesnt mean Developing
countries should always stick to the‘Free
Trade Mantra’.There are Exceptions to
every rule.