Birks – Positive and normative

The distinction between positive and normative has long been part of the introductory economics courses. Briefly:

• Positive – ‘what is’, statements of ‘fact’
• Normative – ‘what should be’, incorporating value judgements

This distinction can be questioned. Any analysis involves framing through: the selection of some components; the exclusion of others; decisions on how the relationships between components will be specified; and choice of what to emphasise.

These are choices, even if made by default because, ‘that is how we always look at things this way’. Consequently, the choice to analyse an issue using neoclassical economics (or some other school of thought) is not a positive decision.

Consider the use of neoclassical economics. Society will be seen as being made up of individuals rather than, for example groups or classes. Allocation occurs through markets for which, in static analysis, the focus is on equilibrium, identified as a price-quantity combination, as if all trades can occur simultaneously. Comparative static analysis, comparing two equilibria, does not consider actual starting points, adjustment paths, or time taken to move from one position to another (if it is actually possible to make such a move). The theories of consumer behaviour and of the firm, where based on indifference curves and isoquants, assume that goods, services and factors of production are infinitely divisible. There is no politics, the role of the media and advertising can be ignored, wellbeing can be specified solely in terms of the variables in individual utility functions, and so on.

All approaches are subject to framing, and so will have limitations of their own. It is important that we understand that. Otherwise we may fall into the trap of thinking that the theory accurately describes the world. As has been said elsewhere, the map is not the territory.

Here is an excellent short piece by Yuan Yang of Rethinking Economics, “Can economists be innocent?” She explores the role and influence of economists, and the way that economic theory can shape perception of important policy issues.

Commentary added, 19th November 2014