The inductive reasoning process outlines the scientific method. It begins with a central problem or question. Scientists then collect information and observe phenomena, after which they draw conclusions, forming general principles. In economics, researchers seek to answer questions by observing real world economic activities and collecting economic data from the appropriate sources. For example, an economist at a public policy research institution may ask if an increase in the minimum wage raises unemployment rates among low-skilled workers. The researcher then identifies appropriate data sources and collects and analyzes the information. He draws conclusions based on the research question.
Econometrics, which applies mathematical and statistical methods to analyze actual economic phenomena, is one of the most important inductive methods in economics. Econometric techniques have enabled economists and policy analysts to study influences on wages and prices, as well as forecast future economic conditions. Large data sets analyzed with econometric techniques enable economic researchers to lend empirical support to various models and hypotheses.
Professor Damodar N. Gujarati outlines the process of econometric research in his book, "Basic Econometrics." The traditional inductive methodology in economics and econometrics includes stating a hypothesis, expressing the hypothesis in mathematical and econometric terms, collecting data, using regression analysis to estimate the econometric model, testing the hypothesis in economics, predicting the future value of an outcome based on available data for the predictor variables and using the results for economic policy.
Because economic inductive methods provide empirical support for economic models and hypotheses, they also inform economic policy decisions by policy makers at the state and national levels. By collecting and analyzing data from businesses and government agencies, economists can reach findings and conclusions that governments can use to shape policy. For example, inductive methods on the impact of tax cuts can help government officials determine the most effective approach to cutting taxes, such as whether to cut them across the board for all taxpayers or to target them to certain groups of people.
The 19th century American economist Henry George stressed the value of inductive methods in economics in his 1897 book, "The Science of Political Economy." George wrote that inductive methods provide human beings with methods for investigating facts until they are certain they have reached laws of nature. This opens the way to deductive reasoning, in which people reason from the general to the specific.