Positive economics studies objective or scientific explanations of how the economy functions. Its aim is to understand and generate predictions about how the economy may respond to changes and policy initiatives. In this effort economists strive to act as detached scientists, regardless of political sympathies or ethical code. Personal judgments and preferences are (ideally) kept apart. In this particular sense, economics is similar to the natural sciences such as physics or biology. To date in this chapter we have been exploring economics primarily from a positive standpoint.
In contrast, normative economics offers recommendations based partly on value judgments. While economists of different political persuasions can agree that raising the income tax rate would lead to some reduction in the number of hours worked, they may yet differ in their views on the advisability of such a rise. One economist may believe that the additional revenue that may come in to government coffers is not worth the disincentives to work; another may think that, if such monies can be redistributed to benefit the needy, or provide valuable infrastructure, the negative impact on the workers paying the income tax is worth it.
Positive economics studies objective or scientific explanations of how the economy functions.
Normative economics offers recommendations that incorporate value judgments.
Scientific research can frequently resolve differences that arise in positive economics—not so in normative economics. For example, if we claim that "the elderly have high medical bills, and the government should cover all of the bills", we are making both a positive and a normative statement. The first part is positive, and its truth is easily established. The latter part is normative, and individuals of different beliefs may reasonably differ. Some people may believe that the money would be better spent on the environment and have the aged cover at least part of their own medical costs. Positive economics does not attempt to show that one of these views is correct and the other false. The views are based on value judgments, and are motivated by a concern for equity. Equity is a vital guiding principle in the formation of policy and is frequently, though not always, seen as being in competition with the drive for economic growth. Equity is driven primarily by normative considerations. Few economists would disagree with the assertion that a government should implement policies that improve the lot of the poor—but to what degree?
Economic equity is concerned with the distribution of well-being among members of the economy.
Most economists hold normative views, sometimes very strongly. They frequently see themselves, not just as cold hearted scientists, but as champions for their (normative) cause in addition. Conservative economists see a smaller role for government than left-leaning economists.
Many economists see a conflict between equity and the efficiency considerations that we developed in Chapter 1. For example, high taxes may provide disincentives to work in the marketplace and therefore reduce the efficiency of the economy: Plumbers and gardeners may decide to do their own gardening and their own plumbing because, by staying out of the marketplace where monetary transactions are taxed, they can avoid the taxes. And avoiding the taxes may turn out to be as valuable as the efficiency gains they forgo.
In other areas the equity-efficiency trade-off is not so obvious: If taxes (that may have disincentive effects) are used to educate individuals who otherwise would not develop the skills that follow education, then economic growth may be higher as a result of the intervention.
This is an appropriate point at which to return to the definition of economics in Chapter 1 that we borrowed from Nobel Laureate Christopher Sims: Economics is a set of ideas and methods for the betterment of society.
If economics is concerned about the betterment of society, clearly there are ethical as well as efficiency considerations at play. And given the philosophical differences among scientists (including economists), can we define an approach to economics that is shared by the economics profession at large? Most economists would answer that the profession shares a set of beliefs, and that differences refer to the extent to which one consideration may collide with another.
A frequent complaint against trade is that its modern-day form (globalization) does not benefit the poor. For example, workers in the Philippines may earn only a few dollars per day manufacturing clothing for Western markets. From this perspective, most of the gains from trade go to the Western consumers and capitalists, come at the expense of jobs to western workers, and provide Asian workers with meagre rewards.
Modern development economics sees the implementation of the rule of law as perhaps the central challenge facing poorer economies. There is a strong correlation between economic growth and national wealth on the one hand, and an effective judical and policing system on the other. The consequence on the world stage is that numerous 'economic' development projects now focus upon training jurists, police officers and bureaucrats in the rule of law!
In summary, governments have a variety of roles to play in the economy. These roles involve making the economy more equitable and more efficient by using their many powers.