A philosophy of economics is a set of theories or hypotheses that explain various economic outcomes. In general, philosophies question why and how something is. Economic theory and causation, which deals with the allocation of scarce resources, seeks to explain the cause and effect relationships between two or more economic factors.
An example of the philosophy of economics in practice is the theory of supply and demand. Those who formulated the theory propose that the prices of goods and services are sensitive to fluctuations in supply and demand. There are some goods that are more price sensitive than others. For example, the prices of commodities such as gasoline fuel will typically be more responsive to changes in supply than they will to changes in demand. A philosophy of economics also seeks to explain relationships between two or more factors and predict outcomes based on social behavior.
There are different groups of thought or theory that comprise a philosophy of economics. Some groups may feel that an overall economy's production level or gross domestic product is not affected by a change in interest rates or prices. Other groups feel that changes in leading economic indicators, such as the unemployment level, do directly affect an economy's level of annual output. Each group of thought explains how rational choices lead to a certain macroeconomic outcome.
A philosophy of economics does more than just come up with theories and hypotheses for economic outcomes. It also actively studies those outcomes and the various ways in which the macro economy responds to different business activities and consumer choices. As a social science, the field of economics is at times somewhat unpredictable and highly subjective. An examination of the diverse economic views of major political figures is enough to prove the point.
For instance, in the United States, the Republican Party generally holds the philosophy that tax reductions will stimulate consumer spending and job creation. On the other hand, the Democratic Party is usually sharply against privatization and generous tax cuts. They believe in more government control over the distribution of income and tend to favor increased government spending on social services. The type of social services that the Democratic Party tends to favor typically benefit disadvantaged members of society or contribute to the overall welfare of society, such as environmental causes.
Those who study economics will also seek methods by which they might be able to prove their theories. They may conduct experiments, surveys, focus groups or some other method of primary research to gauge how and why a certain outcome manifests itself. This can also lead to the development of new hypotheses.