Positive and Normative Principles

- Why Should I Care?

Many of the arguments presented by economists are based on models and a formal pattern of logic. These arguments are quite convincing and they actually affect your daily life, because they affect the labour market, tax levels, and price inflation. Much of what economists discuss has a lot to do with political and social choices. It is crucial that you differentiate the nuts-and-bolts opinions, from the social choice opinions. 

- This Lecture Has 2 Parts

• Positive Principles
• Normative Principles

Principle: “A basic truth, law, or assumption.” thefreedictionary.com

- What are Principles of Economic Life?

Economists have some idea of how the world works. According to the body of research conducted in the past century, here are some of the main principles that – I believe – guide economic activity. For example, you can't just go into a car dealership and propose to pay 1,000$ for a brand-new automobile. Maybe you believe that the world SHOULD be like that. Fine. But it's not.

How the world works is implacable. You can't change HOW the world operates. If you spit in the air, gravity will bring that down on your face.

But we can change some of the outcomes. There is an interplay between the principles that help us understand how the economy works, and the principles that guide our policies to obtain outcomes that SHOULD be achieved.

The course will support some of these principles with models. If you study economics in depth, you will also study the empirical work behind these principles. You will also realize that divergent schools of economics don’t agree on the same “shortlist” of principles.

Positive Principles:                     Explain how the economy works.

Normative Principles:                Argue what the economy should do.

Economic models are designed to explain how the economy works. Their final conclusions, or predictions, are thus what we call positive principles.

Model predictions are used to guide policy. Should we increase minimum wage? Should we make it easier to form labour unions? Should we increase trade with Europe?

The policies chosen by our governments do have social and political consequences, so it’s not a theoretical debate. How society SHOULD be organized is a very social question; it is political, moral, cultural, even spiritual.

Note that models are usually built with assumptions. These assumptions may determine the result. Many assumptions can arguably be normative in nature, and thus skew the process of modelling to produce conclusions in line with the economists’ political views. In this case, a positive-looking principle may in fact be ideology disguised as science.

- Green Policy

Much of Green Economics is based on understanding positive economic principles to enable outcomes that fit a green normative view.

For example, instead of banning the fishing of wild tuna, Green Economics would propose that a tax be imposed on consumers who buy wild tuna at the supermarkets. We know that if the price people pay is higher, then the volume of sales will decrease. Green Taxes for example embrace the positive principles of free-market economics. However, the aim here is not to let markets decide how much tuna is produced, but to use the market mechanism to reduce sales, which is a normative position.

- Climate Change Solution

In many countries, governments are providing a tax-rebate on zero-emission automobiles, such as rechargeable electric cars. This policy is using Green Taxes upside down! Consumers are encouraged, or incentivized, to buy the zero-emission car, over a regular gas car.

A government can even subsidize the deal, by transferring money directly to those who make the desired purchase.

- Democracy Booster

One of the greatest barrage to social change is the belief that things cannot be any other way. “That’s just the way the world works, dear!”

When people believe in the positive principles of life, they end up being closed off to the possibility that those views may be wrong. As a curious person, you have to keep an open mind to possibilities!

Believing that your views are the best, and the only views acceptable, won’t help to improve our society. And this goes for Greens as well! It is possible that Green Ideas can be wrong, or miss the target. Let’s keep an open mind.

• The Positive Principles

1. Economies are Eco-Systems of Interdependent Actors
2. Free Markets Are Self-Regulating
   • Prices are an Information Feedback Loop
3. Incentives Matter
4. Cities Organize Production
5. Locations Are Determined by Transport Costs
6. Trade Can Act as a Knowledge Feedback Loop
7. There is No “Sufficient Condition” To Economic Growth
8. The “Necessary Conditions” to Growth Are:
   Resources, Property Rules, Functional Markets, Trade, Technology, and Competition.
9. Anarchy Does Not Lead to Free Markets

• The Normative Principles

1. Resources Should Not Be Left Idle
   • Everyone Should Have Work If They Want To
2. Wealth Should be Distributed Fairly, But Not Equally
3. Investments Should Be Productive
4. Creative Destruction is a Good Thing
5. Inflation Should be Low Because it Makes Most of Us Poor
6. The Really Important Products Should be Affordable
7. Governments Should Regulate Companies That Go Too Far
8. Taxes Should be Moderate and Fair
9. War Should be Avoided Because it is Wasteful and Hurts the Economy

Throughout the course, each model presented will be accompanied by the list of positive and normative principles associated to it.

There is a summary of all the principles in the Appendix (In-Class Exercises)