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 34 Parts
- Definitions
- Positive Principles
- Normative Principles
- Critique of Positive Economics
What are Principles of Economic Life?
Principles are statements about the world. Scientific principles are basic truths, laws, or important assumptions, that form the basis of research.
Principle: “A basic truth, law, or assumption.”
Economists do have some idea of how the world works. According to the body of research conducted in the past century, there are some main principles that 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.
So there are some principles that explain how the world works. However, humans have managed to modify their landscape, so we can change some of our 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.
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Definitions
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.
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Positive Principles
- Economies are Eco-Systems of Interdependent Actors
- Free Markets Are Self-Regulating
- Prices are an Information Feedback Loop
- People Respond to Incentives
- Deflation Reduces Investment
- Locations Are Determined by Transport Costs
- Trade Can Act as a Knowledge Feedback Loop
- Cities Organize Production
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Normative Principles
- Labour Should Not Be Idle
- Wealth Should be Distributed Fairly
- Investments Should Be Productive
- Creative Destruction is a Good Thing
- Inflation Should be Low
- Goods Should be Affordable
- Governments Should Regulate Companies That Go Too Far
- Taxes Should be Moderate and Fair
- War Should be Avoided
Throughout the course, each model presented will be accompanied by the list of positive and normative principles associated to it. Theoretical economists tend to focus on debating the positive principles used in their models, while applied economists, tend to focus on the policies that provide the normative outcome they are seeking.
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Critique of Positive Economics
As a matter of fact, all models are made up of both positive and normative statements. However, there has been a trend in economics to designate one approach as being outright 'positive', while other approaches are mostly normative. This was the working of Milton Friedman, the father of monetarism and conservative economist. Friedman coined the term 'Positive Economics' in an attempt to improve its status as a serious scientific endeavour.
According to some economists, such as John Komlos, this is a false dichotomy, since most neo-classical, or monetarist, models, are rife with important assumptions, such as the rationality of agents, or the insatiable demand of consumers, which are actually normative statements associated to specific cultural and ethical principles, and are not necessarily universal in neither time nor space.
Of course, there are many binding positive principles which have been discovered, tested and become part of economic theory.
Bien que certaines lois fondamentales ne peuvent pas être contestées, il est possible de concevoir des politiques pour arriver à certaines fins. Il existe donc une interaction entre les principes qui nous aident à comprendre le fonctionnement de l'économie et les principes qui guident nos politiques pour obtenir des résultats qui DEVRAIENT être atteints. C'est de la compréhension des lois économiques positives, et de l'adoption de principes normatifs justes, que survient l'art de l'économie, selon Keynes. Il s'agit tout simplement d'une sagesse dans l'élaboration de politiques économiques, ce qu'on appelle aussi l'économie appliquée.
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.
- References
Friedman, M. (1966). "The Methodology of Positive Economics" In Essays In Positive Economics. Chicago: Univ. of Chicago Press. https://www.wiwiss.fu-berlin.de/fachbereich/bwl/pruefungs-steuerlehre/loeffler/Lehre/bachelor/investition/Friedman_the_methology_of_positive_economics.pdf
Keynes, J. N. (1890). The Scope and Method of Political Economy. University of Cambridge. Reprinted by Batoche Books, Kitchener, On. 1999. https://historyofeconomicthought.mcmaster.ca/keynesjn/Scope.pdf
Komlos, J. (2023). Foundations of real-world economics: What every economics student needs to know (Third edition). Routledge. Chapter 5.9 - The Distinction Between Positive and Normative Economics is a False Dichotomy. p. 94.