Monday, January 14, 2008

Positive Economics

Economists like to distinguish between Positive Economics and Normative Economics. Positive Economics describes how things work. For example, if prices go up, demand will go down. Normative Economics describe what should be. Normative Economics seeks an ideal economic system.

When I was training in economics, my teachers all preferred to concentrate on Positive Economics. Having no absolute ethical standards, they really had no option to stay with Positive Economics. They said they would leave the politicians to decide what should be done, while they concentrated on working out how it could be achieved. A few Marxists did get into Normative Economics, because they had an ethical system (or at least an historical imperative) which allowed them to make assessments of economic programs and system.

In some ways that avoidance of Normative Economics was an embarrassment. An economist who cannot tell you what should be done is not much help. So in recent years, economists have sneaked back into Normative Economics. One approach has been to use cost benefit analysis. An economic program is good, if the social benefit exceeds the social costs. The fact that measuring social costs and social benefits is practically impossible is conveniently ignored.

Economists have also used Positive Economics as a backdoor in to Normative Economics. For example an economist will do a study to decide which level of tax is most efficient, in terms of gathering the most revenue for the least loss of production (the Laffer curve is an example). This is positive economics, because it is looking at the effects of particular problems. However, once the most efficient tax rate has been decided, it suddenly becomes something that should be implemented. Positive Economics morphs in Normative Economics without anyone noticing.

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