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Modus Tollens for Economists

July 31, 2012

Modus Tollens, otherwise known as denying the consequent, is a logical syllogism which takes the following form:

1. If A, then B.
2. Not B.
Therefore, not A.

An example:
If it were raining, the sidewalk would be wet.
The sidewalk is not wet.
Therefore, it is not raining.

Economists use this type of reasoning all the time to guide their search for explanations of social phenomena, usually with an assumption or two about human motivation.

A company would not do A unless it earned them money.
Companies do A.
Therefore, A must be profitable.

or

Someone would not spend a lot of money doing X unless they really enjoyed/valued it.
Someone spends a lot of money doing X.
They must really value X.

Bundled into this logic is the assumption that companies act to gain profit, or at the very least, that unprofitable companies go out of business and that individuals act to maximize their welfare. Understanding the motivations and actions of people helps to understand the constraints they face. No social scientist can read other’s thoughts. We must instead rely on revealed preference. In normal English, this means we watch what people do, and try to figure out what they want based on that. Next time, when you see an odd behavior, try to think which preferences and constraints might lead someone to act that way.

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