Economics

Learning Plan 1: Positive and Normative Economics

It is one thing for someone to explain the connection between smoking cigarettes and physical health and quite another for that person to suggest that the government should make cigarette smoking illegal. It is one thing for an economist to explain why the price of gasoline is $1.90 per gallon and quite another to suggest that the price of gasoline should be lower. It is one thing for an economist to explain why the unemployment rate is 5.3 percent and quite another for an economist to insist that the unemployment rate should be less than 1 percent. Do you see the differences in the examples given above? One is a description of what is (the unemployment rate is 5.3 percent) while the other expresses a value judgment (the unemployment rate should be less than 1 percent). The issue that is being raised here, and the one that we are constantly confronted with, is the importance of differentiating between an analysis of what is and an analysis of what we think should or should not be. If we want to conduct a valid economic analysis, then we must be willing and able to separate our views about what does happen in the economy from our views about what we would like to have happen in the economy. We must be willing and able to separate what the facts (gained through direct experience and observation) tell us about the questions that we want answered, from what our feelings tell us about how we want the answers to turn out. Quite simply, we need to be aware of the difference between a statement of fact and a value judgment. Economists refer to an analysis of fact as positive economics and an analysis based on value judgments as normative economics. Positive economics is descriptive economics because in doing positive economics, our goal is to describe, as accurately as possible, what is. When economists describe the economy, make predictions about how the economy will change, or explain the effects of different alternatives, they are involved in positive economics. Positive economic statements may be simple or complex, but they are always about matters of fact. The word positive, as we are using it here, means what is. It does not mean something good or desirable. We do not have to agree with a statement, like it, or wish it to be true for it to be a positive statement. If the statement describes what is, it is positive whether we like what it says or not. Most positive statements are testable, which means it is possible to prove such statements false by evidence gained through direct experience and observation. When disagreements over such statements arise, they are effectively addressed by an appeal

to the facts. Positive economics deals with cause-effect relationships that can be tested. For example, consider this statement: A high interest rate causes new housing starts to drop. Notice that nothing is said about whether or not a high interest rate is good or bad. No value judgment is stated or implied. The statement only points out one possible consequence of a high interest rate. We can check out the facts in the real economy to determine whether or not the statement is false. Positive economic statements can be disproved or rejected by reference to the facts. The unemployment rate is 5.3 percent is a positive statement. Last year, the economy grew 2.2 percent is a positive economic statement. An increase in investment spending will cause the level of economic activity to rise by more than the increase in such spending is a positive economic statement. Each of these statements deals with data, facts, and economic reality. All value judgments are conspicuously absent. Normative economic statements are quite different. Normative statements are focused on what we believe should be or ought to be. In such statements, we express our judgments about what is good and about what is bad, what is desirable or undesirable, what is right or wrong. We make value judgments and state our opinions rather than confining ourselves to a description of the facts. Normative statements are not testable. This means that it is impossible to prove such statements false by referring to factual evidence gained through direct experience and observation. The following is an example of a normative economic statement: The interest rate is too high. Notice the value judgment. It is as if we are saying that the interest rate should be lower. Two people can look at exactly the same interest rate and come to a different normative conclusion about it. For a person planning to borrow money to build a new house, the interest rate could be too high. For a person saving for retirement that exact same interest rate could be judged as being too low. There is no way we can use the scientific process, with its appeal to factual evidence, to disprove either of those judgments. We agree or disagree, based upon our opinions. Normative economic statements express a subjective opinion and involve our value judgments about how things should be. The unemployment rate of 5.3 percent is too high is a normative economic statement. The economy should grow more than 2.2 percent a year is a normative economic statement. Government should do more to help eliminate poverty is a normative economic statement. Each of these statements deals with what we think should be and with making judgments about the rightness or wrongness of various aspects of the economy. With normative economic statements, reference to the facts is conspicuously absent. Now that we appreciate the difference between positive and normative economic statements, it is important for us to notice that there is nothing absolutely wrong about doing a normative analysis. We just need to be very explicit about precisely which values we are incorporating into our analysis. We need to identify and share those values that led us to the conclusion expressed and the action advocated. We need to explain why we believe something should be one way rather than another. It is essential that we make our position clear so that everyone knows (especially ourselves) where our positive analysis ends and our judgments begin.

Actually, positive and normative economics complement each other. We cannot do a good normative economic analysis unless we have first done a good positive economic analysis. Before we can make a judgment about the desirability or undesirability or any action or policy, we must first have a clear understanding of the real consequences associated with such action or policy. We use our values in establishing our goals. Positive economics will help us determine whether or not the actions we propose to take will actually allow us to achieve our goals. For example, suppose we believe that teenagers should have higher incomes. We even have an idea as to how our goal could be achieved. We will support and demand an increase in the minimum wage. Will our idea work? Will an increase in the minimum wage actually lead to an increase in teenage income? Just because we think and hope that our idea will work, does not mean that it will. This is where a positive analysis of the minimum wage can help us. It helps us to see what is. A positive analysis will help us see the real economic consequences of an increase in the minimum wage. A positive economic analysis will help us answer this important question: Will an increase in the minimum wage result in an increase in teenage income? When preparing to choose, we start the process with a positive analysis so that we know what the facts are and then we apply our values in making the final decision. Positive economics deals with what is. Normative economics deals with what we think should be. Positive economics deals with facts. Normative economics deals with making value judgments about what the economy should be like. If we want to manage the basic economic problem better, then we must be sure that our values are clearly identified and stated aside from our positive analysis. We need to know what values people are using to arrive at their conclusions, but we do not have to agree with, or otherwise support, those values. In order to make good choices about how to use our scarce resources to satisfy some of our unlimited wants, it is necessary that we keep our views about how things should work in the economy separate from our views of how things actually do work.