Like other social sciences, economics has its own laws. A law is a statement of what must happen given certain conditions. Every cause has a tendency to produce some result. For example, in Physics, we study that things fall to the ground because of gravitation. The law of gravitation is a statement of tendency. Similarly, the laws of economics are statements of tendencies. For example, according to the law of demand, when there is fall in the price of a good, the demand for it will expand. It means that there is a tendency among people to buy more when there is fall in the price of a good. Similarly, if price rises, they will buy less. Laws operate under certain conditions. If these conditions change, they will not operate. This is applicable to all sciences. When some economic laws do not operate, it means that the conditions have changed.
We may broadly classify sciences into physical sciences and social sciences. Physics and chemistry are examples of physical sciences. Economics, politics are examples of social sciences. The laws of physical sciences are exact. But the laws of economics are not as exact as the laws of physical sciences. For example, we have the law of gravitation. It is a simple and exact statement. But in economics, we deal with human beings and their behaviour with reference to economic activity. We cannot conduct experiments with human beings either within the laboratory or outside it. That is why economic laws cannot be as exact as the laws of physical sciences. We may also note that we study about average human behaviour in economics.
As economics deals with man and his behaviour, its laws are complex and inexact. That is why Marshall has said that 'the laws of economics are to be compared with the laws of tides rather than with the simple and exact law of gravitation'. The science of tides explains the tides rise and fall under the influence of the Sun and the Moon. Probably there will be high tide on a full moon night. It may be there or it may not be there. It is only a probability.
Similarly, economic laws also indicate probable trends. For example, when there is increase in the quantity of money, there may be increase in the price level. But we cannot say exactly by how much prices will rise. But economic laws are more exact than the laws of history and politics because economics make use of money as a measuring rod of utility. Though money is a rough measure, it gives a concrete shape to economic laws.
All economic laws are based on certain assumptions. Let us take the law of demand. It tells that 'other things being equal', when the price of a good falls, people will buy more of the good. By 'other things being equal' we mean (1) that the income of the people remains the same, (2) that their tastes remain the same (3) that the prices of other goods remain the same, and (4) that no new substitute for the good is discovered. The law will hold good only when the above assumptions are fulfilled.
Sometimes, it is said that the laws of economics are hypothetical. That is, we make an hypothesis. Only after it is verified by facts and experiments and found true, it becomes a law. But many economic laws cannot be verified by experiment. That is why we say sometimes that economic laws are hypothetical.
The laws of physical sciences have universal application. But that is not generally the case with regard to economic laws. Of course, there are one or two exceptions. The Law of Diminishing Returns has universal application.
Economic laws are of great importance in practical life. Some economic laws are applicable to all types of economic systems. They have universal application. For example, we have the law of Diminishing Returns. There are other important laws such as the law of diminishing marginal utility and the law of demand.
Some economists believe that the quantity theory of money is valid under all economic systems - capitalism or socialism or mixed economy.
Let us take some important laws like the law of diminishing marginal utility, the law of demand, the law of diminishing returns and the Malthusian Theory of population and discuss their significance.
The law of diminishing utility is based on actual experience. It tells that the more and more of a thing you have, the less and less you want it. It explains the relationship between the price of a good and the satisfaction you get from it. During summer, generally, there will be fall in the price of mangoes because they are available in plenty. So there is diminishing utility. And as price is related to marginal utility, the price falls. Progressive taxation is based on the law of diminishing utility. As the income increases, the Government ask the rich to pay more taxes by increasing the rates of taxation for them. For it believes that as a man gets more and more money, he will get diminishing utility from it. So even if he parts with more money, the sacrifice will not be much in his case.
The law of demand is based on actual experience. In practice we find that when price falls, demand increases. Price falls when supply is more. When there is increase in the supply of a good, its marginal utility diminishes. A seller will try to sell more of his good by reducing its price slightly.
The law of diminishing marginal returns has universal application. In agriculture, it means that we cannot double the output by doubling labour and capital. The law applies to manufacturing industry also.
The Malthusian theory of population tells that population increases at a faster rate than food supply. It might not be an exact statement. But it was true in the case of most of the poor countries of the world until the Green Revolution. The Green Revolution helped in increasing agricultural productivity. There is the problem of over- population in most of the poor countries of the world. That is why they spend huge amounts on family planning to reduce population growth. So, most of the laws of economics are of great practical importance.