Distinction Between Positive and Normative Economics Misses the Point 48 comments
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Am I the only one who feels unfulfilled by the standard distinction between positive and normative economics?
I am gearing up to return to the classroom next week, to teach microeconomics to incoming masters students at the Georgetown Public Policy Institute. Anyone who’s experienced the first day of micro class knows what’s coming. After introducing myself and talking about the wonders of economics (which is, indeed, fun, useful, and enlightening), I will launch into the great positive vs. normative distinction.
In brief:
- Positive is the science side of economics: understanding and predicting the behavior of individuals, firms, markets, economies, etc. In short, the part of economics in which we try to be physicists (or, sometimes, biologists).
- Normative is the side of economics where we make value judgments, identifying policies as good or bad. In short, the part of economics in which we try to be philosopher-kings.
Both styles of economics are important, particularly in a public policy program. And drawing a careful distinction is vital, not least because of the many people in Washington (both economists and non-economists) who try to dress up their value judgments as science.
I have one problem with this distinction, however: it overlooks a great deal of what economists actually do.
Here’s one simple example: Congress is considering legislation that would create a cap-and-trade system for limiting emissions of greenhouse gases. Under that system, emitters would have to own enough carbon allowances to cover their emissions.
Congress is also considering using an auction to distribute some of these allowances. As a normative matter, I think that’s a great idea (but I wish they would auction even more).
Suppose that Congress decides that the auction should be designed in order to raise as much money as possible for the taxpayer. (Which I also think is a great idea – again a normative judgment.)
Question: When economists work to design this auction, are they doing positive economics, normative economics, or something different?
It seems clear to me that these economists are not doing positive economics. After all, they are designing a system, not observing how it works.
However, I don’t think they are doing normative economics either. As I’ve structured the question, the economists aren’t engaged in any value judgments. Congress has made the relevant normative decisions (e.g., deciding to use an auction to maximize revenue and deciding how many allowances to give away). The economists are just trying to figure out how to accomplish that goal.
In this case, I think the economists are acting as engineers, not scientists or philosopher-kings. And based on my years in government, I can tell you that there is a lot of economic engineering going on.
So, I am tempted to tell my students (in direct contradiction to the textbook) that there are actually three kinds of economics: positive, engineering, and normative.
Which leads me to two questions for my illustrious readers:
- Am I wrong here? Should I just shoe-horn my “engineering” idea into the normative category, as most textbooks do? (That’s a gain in simplicity and conformity, I suppose, and it reflects the reality that engineering can slip into normative; on the other hand, it loses the fact that some pieces of economic advice — e.g., how to maximize revenues — do not involve value judgments.)
- If you think I’m right, what should this third piece of economics be called? So far, I’ve considered words like “Design”, “Engineering”, and “Prescriptive”. The last one isn’t very good (since normative conclusions could also be prescriptive), but at least it ends in “-ive”.
Thanks.
P.S. A few years ago, Greg Mankiw had a nice article on the dual role of macroeconomists as engineers and scientists; it appeared in the Journal of Economic Perspectives (here’s an ungated version).
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This article has 48 comments:
The only way to win the game is to not play.
In the article above, Cap and Trade is the example. That a Normative decision has already been made by Congress is the premise (US House of Representatives to be accurate as the Senate buried the Bill hence “Congress” is inaccurate).
The Normative decision (decision made) regarding Cap and Trade , is really a decision already made based on Political-Economy. It’s a Normative Political-Economy decision as the Politics is Climate Change, aka Global Warming, aka Global Cooling (or what ever its called this week). The Economics of those that support Cap and Trade are what you call “design”. In other words, the Positive Economics was “designed” to match the Politics. The Political-Economy Normative decision is hence “designed”.
Your example within the article becomes mighty fuzzy as the Normative Decision was based on Positive Political-Economy and the “design” embedded there in.
Design is likely political in nature (Normative) as well as Positive Economics. In other words, design is based in both Normative and Positive Economics. Your “design” concept could easily be shown as Normative in the area of Politics in Social Engineering Economics. The “design” concept could likewise be applied to creating an economic frame work for a decision already made but then the “decision made” was Normative. Design in Positive Economics is the analysis of the mechanics of the economics of a proposition. However, “design” in Positive Economics can easily become Normative in nature if one uses Positive Economics to support a Political Position.
Economists are NOT engineers, and this seems to be particularly true of the government types. They tend to stop at Phase 1 and very rarely go on to Phase 2 - I am not sure that they EVER get to Phase 3.
On the other hand, in answer to your question, "engineering" does seem to fit the term needed. I just wish that they were better at it or just did not do it at all.
My view is that any idiot can design a system, and especially lately, but that doesn't mean the system will be desirable (normative) or function as intended (positive). In my view a good economist is one who sheds both normative and positive insight on system design (or, more broadly, any form of human action).
I am a biologist, I get economic predictions right more than economists, where economics went wrong is they didn't check their numbers, or their "t" tests, or their valuations.
Economics is nature - that's biology.
We are being eradicated by the entire world, our own employees, the government and special interest groups.
We were the entire economy's best customers.
And we have shrunk by record numbers in the past 9 years.
Yep, Destructive is apt.
Of the economists who have contributed most to our elevation from the barberous and primitive, it is good that ALL of their potential went unrealized. Had it been otherwise, the dismal pseudo science would have everyone depressed bearing a countenence resembling that of Nouriel Roubini, only unlike him, they wouldn't know exactly why, because "it", as in the case of economics itself (if honesty prevails), defies true definition.
But in the end a quote rings from somewhere in my memory which goes something like this: "A man who fails in his profession is seldom deserving of pity." Go figure.
So call the 'engineering' of the Cap and Trade program the same as what you would call the 'engineering' of the IRS, the Tariff system, property tax systems, etc.
The study of it sounds 'positive' to me, but ONLY in YOUR definition of 'positive economics.'
Government operates to maximize political returns. Economics does not truly guide the operation or the goal of government, economics can only be used to analyze the results. An economic "engineer" is simply a different way of saying "ruler" or "overseer" or "lord' or "dictator" or "king".
It's not surprising that you don't understand this. As a Georgetown professor, you're a member of the self-appointed ruling class and you probably have no real understanding of Americans' lives this "economic engineering" will harm.
Maybe you remember the phrase "let them eat cake"? Green energy is the modern equivalent. I'm not sure who the modern equivalent of Marie Antoinette is, but we're a long way down the road to finding out.
Do you sleep well?
He was at least 51% right. I taught mathematical economics for centuries, but now that I think of it, the mere fact that I took it seriously and was careful about the book I used meant that it was normative. What do I mean by that? I mean that the people who studied under me were not dumber when the course was over than when it started, as is often the case.
By the way, let me tell you how I introduce myself to students. I tell them that I am the best economics teacher in the world, and I expect them to learn what I teach PERFECTLY. A couple of students at the Asian Institute of Technology last year didn't get the message at first, but they saw the light before the class was over. And I kid you not.
I think we should examine the opposite problem; that is, why should we have a branch called "normative" economics? Economics generally describes the study of opportunity costs. You can have positive analysis (the function of economics) and normative analysis (the function of sociologists).
Then you can use economics to minimize the harmful impact of sociologists.
The underlying problem is that all our ideas, both positive and normative are part of the situation to be clarified. It's another version of the same problem moving through all our academic disciplines.
Both positive and normative are mental constructs. At some levels of analysis, over some time frames, they are pretty good predictors. But like Newton's laws, they fall apart at different levels of analysis.
Maybe a way out is to combine positive and normative into evolutionary which might capture the never ending dialetic between the two.
It might be similar to the dynamic described in the Art Instinct. Life wants to replicate in a physical environment. There are two constraints. The need for safety. The need to reproduce.
On Aug 29 02:57 AM Dialectical Materialist wrote:
> And oh yeah, what about "constructive" for the third branch? It implies
> a system and it ends in -ive.
Normative
1. Is the policy goal good or bad?
2. Is this a policy goal full of deception and hypocrisy?
3. Is this a policy goal a violation of the golden rule of civilized mankind, i.e., treat others as you would have them treat you?
4. In a world full of known and stealth sociopaths in high and low places, is your scientific prediction model of individual behavior taking those sociopaths into account?
On Aug 28 07:20 PM storm999 wrote:
> I have a degree in philosophy and I would say you are completely
> correct. The design and implementation of system of exchange is a
> form of engineering. From my perspective, one of the great problems
> we have in this country is that people often argue about the consequences
> of implementing a system without discussing the normative issues.
> This is deliberate. For example, with health insurance reform, it
> is much better for several parties not to discuss the ethical issues,
> but rather to inflame passions and attack the implementation of reforms.
At the behest of politicians, economists are told/allowed to not examine or judge, but instead, to attempt to create an actual change; to try to circumvent the current economic reality.
Often this is simply a brainwashing double speak intended to confuse the public, with no chance of success.
So yes, it is usually merely politics as usual.
Just my thoughts.
"Prescriptive" doesn't work because "prescriptive vs. descriptive" is a pretty good way of explaining "normative vs. positive" to students who have no previous exposure to the terms.
"Design" just doesn't feel right either... too vague and too reminiscent of "interior design" or capitalized, "Intelligent Design".
"Engineering" sounds about right to me. Moreover, it provides a context for understanding the limits of a particular science and perhaps a check on regulatory (or financial market) hubris.
Just as a civil engineer designing a bridge will rely on a body of (positive) science to conclude that his structure will function as expected, an engineering economist designing the contours of a cap-and-trade auction does the same. And just as the civil engineer may use an incomplete model (let's say Newtonian physics) which ignores unnecessary detail (like relativity and particle physics), the economist will also do the same (by assuming, inter alia, rationality, complete markets, the law of one price, no collusion, etc.)
A honest "engineering" economist will then consider whether his assumptions can reasonably be expected to hold (and his abstractions can be safely ignored) in the real world before recommending that the system will work as designed. This would be a healthy addition to public policy debates that too often are conducted in sound bites about ends and goals without a realistic discussion of the means by which we get there.
Finally, one of the most interesting subjects in engineering is failure analysis. Watching the Tacoma Narrows bridge fall down (and understanding why) brings the topic alive. The recent financial crisis should provide many opportunities for failure analysis in the sphere of economic (or financial) engineering that will leave your students with equal amounts of understanding and humility at the end of the semester.
Epistemology is rooted in three questions: 1) What do I (you) know; How do I (you) know it; and, What does it mean?
Your "Positive Economics" lies in the How-do-I-know question. The question usually falls to a listing of observables that are taken as the foundation of the knowledge we then construct and declare. In Economics, one would say "I see thus and so and thus and so".. From this, I declare the following to be true.
The "I declare the following to be true" is the What-do-I-know resulting from the How-do-I-know foundation.
Your "Normative Economics" is in the What-does-it-mean. It arises as a set of value judgments. It usually is described as the effect on ones world as a result of holding foundational truths and declaring knowledge from those truths. It could also encompass your sense of a "call to action" (my quotes). Or, If I believe such and so based on my held truths of such and so, then my world of behaviors is altered and I act in this way and that. I regulate. I do social engineering. My behaviors are rooted in Economic Truths.
Your quandary appears to be in the shift from Economics as a thing to Know (descriptive), to Think (reason and theory construct), and then to Do (prescribe behaviors).
Have your students ponder the following and, then, find a set of examples to illustrate their justification for the labels.
1) Normative - When knowledge is declared based on a sense of what the larger group thinks. "I talked to lots of Economists and this is what we think". Sadly, quite common. "The leading Economists believe ..."
2) Authoritarian - When knowledge is based on the thoughts of a single person, the Authority, The Great Leader. "The Great Economist (insert name) states that ... Therefore, that must be true." What would Milton F. think and do at this point?
3) Conservative - (don't confuse with the political Conservative label). Knowledge based a defined structure of principles. The principles are often enumerated. "The Austrian School of Economists developed a theory of economics that includes ... Therefore, thus is the proper view."
4) Informative - Knowledge is malleable and adapts to new information. "Until the recent events caused a collapse, we believed ... A new understanding is now needed to accommodate ... " Notice the Normative roots followed by a shift in understanding. Common amongst Economist pundits who feel a need to explain why things change.
Write a set of names on the board and ask your students to describe the Economic views held by each. Bush, Obama, Hoover, Reagan, Chavez, Friedman, etc. Then, create fireworks. Ask which is the best for governing the U.S.
Write their responses on the board
Finally, for their What-does-it mean behaviors, ask your students if they think they sound more like Economist, Behavioral Scientists, or Politicians.
Sounds like great sport in the Economics classroom.
Cheers... REN
What they are telling themselves. They were living it out. Inheriting an medicare D is to inherit an all coverage universal health care. Spending more is deficit spending more than what could be make more in the money. Monetize not to buy back but more of their red ink and the currency crash in all the same way.
Do you have an power outage? You need an economic engine on line.
I was taught that economics is a social science. Besides the obvious inference that it's dealing with people, and probably because of it, economics, especially macro, has a difficult time being prescriptive. Until I took a course, I always wondered if applied economics was finance.
Applied economics, or economic engineering, becomes less useful at the macro level because of the higher level of complexity / ambiguity and consequent lower understanding. In engineering, which is applied "hard" science, it is common to be versed in the social implications of technology. This awareness is enough to raise issues in appropriate forums in the realm of politics and morality. Apparently, economists and doctors are the only science practitioners who presume to make value judgments.
While it is tempting to consider all economics normative, as one comment said, in fact, economics is a science and should have no normative or prescriptive aspect. Calling politicians and bureaucrats who make value judgements, then implement economic theory in the form of rules and regulations economists is a misnomer.
On Aug 29 01:19 PM Hazel Henderson wrote:
> If only economists would admit that economics is a profession , not
> a science , we would all be better off. Even the Bank of Sweden's
> prize in economics which they foisted onto the Nobel Committee to
> dress up economics as " science" is now coming unglued. I and many
> others, mathematicians who point out economists' misuse of mathematics
> to hide their normative assumptions , including Nassim Taleb, Paolo
> Triani, Ralph Abraham , as well as historian of science Robert Nadeau
> , physicist Fritjof Capra have joined with Peter Nobel, Alfred Nobel's
> descendent , in calling for this Bank of Sweden Prize to be de-linked
> from the real Nobels. For my articles on this see HazelHenderson.com
> click on Editorials
IF you assume that people behave according to the assumptions of rationality and optimization, then you can form solutions that get you the better result for the same input, or the same result with less input.
To me, the first part of microeconomics is about showing why demand curves should have negative slopes and why supply curves should have positive slopes. This is key to ultimately establishing that markets are efficient.
And establishing this is CRITICAL because if markets are efficient, then you can argue that rules and regulations can do more harm than good: they force an equilibrium that is less than efficient, and as a regulator (either lawmaker or bureaucrat), you better have a damn good reason for messing with something that already works well.
BUT, this all depends on having demand curves slope down and supply curves slope up; i.e. that there actually IS an equilibrium and it is relatively stable.
Since virtually ALL of the efficient markets hypothesis is based on Welfare Economics, whether an equilibrium exists becomes one of the most important questions economists could address.
So, I think a better question would be one that occurs just after going through the assumptions driving downward sloping demand curves, and that is, "Is it true?".
If you think people behave rationally, how do you explain momentum investing, where as the price RISES, demand...RISES? And as the price rises, people tend to hoard (e.g. oil, gold,etc), and supply may actually...FALL?
Not only that, what happens when you introduce risk where the pain of loss FAR exceeds the rewards of winning?
If markets do not have stable equilibria, then the need for laws, regulations and governance becomes very clear.
Exhibit A is Ben Bernanke and Alan Greenspan. Up until last fall, their prevailing view is that markets will tend to operate efficiently on their own. Smart people acting in their own best interests were to provide better policing than any set of rules or regulators.
It now seems that they subscribe to the view that any competitive "game" needs boundaries and rules, including the security markets.
In the belief that students will benefit from the use of terminology that makes sense, I would describe your three approaches to economics as: Analytical, Applied and Ethical where Analytical represents "pure" science, Applied represents the identification of means to an end and Ethical represents the identification of "equitable" outcomes or objectives. Frankly, I find the last a bit of a stretch for Economists, MBAs or Lawyers per se. Unfortunately, as a practical matter it does not seem that the Elected are very good at it either.
Ken Gibson
Oakland, CA
In the case of using cap and trade auctions to limit or cut emmisions with the hope of reducing the present 450 ppm to the 350 ppm necessary to prevent us being irreversably over the tipping point for the next couple of centuries its a matter of life and death for most of the species on this planet including the human race and we have less than a decade to accomplish our goal.
After that the temperature warms enough that the methane hydrates altready being observed outgassing have added enough greenhouse gasses to melt the polar ice and raise sealevels enough to cover our cities putting their nuke plants underwater where they can't be maintained and go boom.
Imagine the cost of rebuilding the world's major cities in a decade.
The idea of having to decommission and relocate all the nuke plants using seawater for a coolant is just one rarely considered cost. Try costing out the redesign and relocation of all the sealevel infrastructure supporting a planetary population in the billions
Resource wars are rather likely to increase as the price of oil goes up and all the money flows toward OPEC. We are already back up over $70 a barrel and the supply is finite while the demand is not.
Whats money worth when people can no longer afford to commute to work or go shopping and even if they were so inclined nobody can afford the cost of trucking goods to market.
Lets say you are a Republican of the Inhofe persuasion, still think there is no such thing as peak oil or global warming, voted for the methane hydrates act of 2000, thought it was all about new reserves of natural gas, invested in BP, COP and XOM, shouted drill baby drill, and expected that worst case for climate change you would get a northwest passage to connect the lower 48 to Prudhoe Bay. Suppose you are wrong...
Suppose the rate of temperature increase and thus sealevel also is increasing at an increasing rate as scientists who know what they are talking about have warned us. The glaciers and snowcaps that provide water for our industrialized and centralized agriculture are almost gone already. Opportunistic diseases, climate change, the extinction of species and the dying of the oceans and rainforests that serve as the planets lungs will deprive us of food and oxygen much sooner than has been predicted even by the IPCC.
Money won't buy you time when the plauge, famine, pestilence and oppressive heat begin making large areas of the planet uninhabitable. Two decades ago scientists thought we had maybe a century to turn it around. A decade ago they were admiting some suprise at how fast things were progressing and the IPCC was beginning to take scenario A2, the one with no mediation seriously.
Now that the Bush administration is gone and real science is peeking its head out from under the matresses again its recognized that the costs of mediation may be more than money.
We are going to have to get used to a planet with a slower pace, fewer people doing fewer things in a smaller geographical area.
The limit on this may not be entirely within our control.
Our range of options is going to decrease rather than increase. Even if we change over to solar self sufficient alternative energy immediately and do away with carbon based fossil fuels completly, much of the damage has already been done.
The mental three-legged stool for doing this is Requirements, Analysis, and Synthesis. Requirements define what needs to be there including constraints and value judgements. Analysis pulls apart, understands, and describes what is. Synthesis builds the solution.
Normative Economics and a base body of Economic Principles from Positive Economics reflect Requirements. The understanding part of Positive Economics goes with Analysis. The constructive/ design portion that you are looking to label is aligned as Synthesis which I offer for consideration.
I understand the distinction made between positive and normative, but economics is different methodologically speaking from physics. One way to know this is just to see the power of prediction in either case.
Economics is based on human choice and scarcity, and that goes to a psychological level which demands rigid structuralization of assumptions to come out with anything meaningful.
The point: anything positive in the field of Economics is just not comparative to physics and hence presents a problem of definition before one even gets to the question of the difference between positive and normative.
Humans build economic systems, G-d builds physics. So the positive question about the working of the economic system is dependent on the normative construction side of things. Or perhaps better stated, interdependent.
Construct a fiat money system with a Federal Reserve and this affects the postive nature of eonomic workings one would find without such institutions.
The Budget Office has predicted Cap and Trade could cost up to one million US jobs that the government compensates for with other provisions in the bill.
Shouldn't the real question be..........is it worth it? I have been waiting for scientific data proving global warming beyond theory for 20 years. I continue to hear it causes hurricanes, forest fires, melting ice caps, disturbs weather patterns etc..
Before anyone argues....just post a link indicating a statistically relevant increase in GLOBAL temperature and there will be no further argument. If I had proven global warming.... . people would no my name, my proof would be all over the internet. If you can post data You win! Any other comment and you lose....and after 20 years I am feeling pretty confident!
As several previous commenters have indicated, there are more concerns on the facts and true values of any economic initiative such as the cap-and-trade than on the details of how to carry it out.
I would interprete them as suggestions for emphasis on the "Positive" and "Normative" in forming an economic initiative, while I think the "engineering" or "design" should be determined as parts of details with same "Positive" and "Normative" considerations.
I'm afraid it is you dear sir, who has missed the point. The forest for the trees, as it were.
Your keen acuity with the nuances of pedantic minutiae regarding economics notwithstanding, the elephant in the living room is the fact that the current economic tsunami unfolding has thoroughly discredited virtually all mainstream Keynesian economists.
Their theories and premises lay in ruins, sir.
Only the so-called Austrian School economists saw this coming, and until people learn what money really is (ask Francisco D'Anconia), then any human civilization will have economic collapses. We're not even in the 2nd inning of this one.
What would be the economic results? And delving into the sociological side of economics, what would be the political results?
Assume various levels of corruption. 1% 5% 10% 20% 40%.
How many jobs will be destroyed by the taxes required to support the 1 million whose jobs the government intentionally destroyed?
As much as policymakers try to pretend they're looking for the best solution, their actions betray that entire concept. In every government in the world, policy actions are dictated by what a politician thinks will work, and what they got elected on. Economists are only brought in later to prove the position, not to validate it.
The current health care debate is a perfect example. It's a political battle being waged on 100% ideology. Do you really think anyone on either side would change their position if a positive economic analysis disputed their beliefs? That research is out there, but no one cares.
When I was in I/T at one college, many "academics" could not turn on a printer. When somebody like me has to tell a Harvard MBA that the giant blinking led is the power button, then I wonder if she should be haranguing students with her brilliance.
Now, I am involved in politics. Finally, a group that makes academics look as smart as they think they are.
P.s. - Economic activity as quantified by resource allocation - if it can be tracked & measured - is not purely nominative. Just the means of ecouraging activity is.
On Aug 29 08:54 AM Ferdinand E. Banks wrote:
> Well, let's see Professor Marron. I not only am the leading academic energy economist in the world, but I am a great great teacher. I must confess though that I have never thought about this normative vs positive thing because, according to one of my teachers - Gunnar Myrdal - all economics is normative.
>
> He was at least 51% right. I taught mathematical economics for centuries,
> but now that I think of it, the mere fact that I took it seriously
> and was careful about the book I used meant that it was normative.
> What do I mean by that? I mean that the people who studied under
> me were not dumber when the course was over than when it started,
> as is often the case.
>
> By the way, let me tell you how I introduce myself to students. I
> tell them that I am the best economics teacher in the world, and
> I expect them to learn what I teach PERFECTLY. A couple of students
> at the Asian Institute of Technology last year didn't get the message
> at first, but they saw the light before the class was over. And I
> kid you not.