Positive Economics
Positive economics is a branch of economic theory that focuses on describing, quantifying, and explaining economic phenomena as they are, based on objective facts and verifiable relationships. It deals with "what is," rather than "what ought to be." Unlike other approaches that incorporate value judgments or opinions, positive economics aims to develop statements and theories that can be tested and proven or disproven using empirical evidence. This methodology strives for a scientific approach to understanding how economies function, much like natural sciences observe and analyze the physical world.
History and Origin
The distinction between positive and normative economics gained prominence in the 19th century, with contributions from economists like John Stuart Mill and John Neville Keynes (father of John Maynard Keynes). Keynes, in his work The Scope and Method of Political Economy (1891), formally defined positive economics as the "science of what is," contrasting it with normative economics, which addresses "what ought to be." This conceptual separation aimed to promote a more objective and scientific study of economic uniformities, free from ethical judgments.4
Later in the 20th century, Milton Friedman significantly popularized the concept of positive economics with his influential 1953 essay, "The Methodology of Positive Economics." Friedman argued that the validity of an economic theory should be judged by its ability to generate accurate and verifiable predictions about economic outcomes, rather than by the realism of its underlying assumptions. His work emphasized the importance of hypothesis testing and the development of operationally meaningful theorems. This methodological stance sought to establish economics as a rigorous science capable of explaining cause-and-effect relationships within the economy.
Key Takeaways
- Positive economics focuses on factual statements that can be tested and verified.
- It describes and explains economic phenomena without expressing value judgments.
- Its objective is to understand how the economy works, predict outcomes, and analyze cause-and-effect relationships.
- Key areas include describing market behavior, analyzing the impact of events, and forecasting trends based on data analysis.
Interpreting Positive Economics
Positive economics provides a framework for understanding and analyzing economic events, trends, and policies by focusing on objective, testable statements. When economists engage in positive analysis, they are seeking to answer questions like "What is the effect of a tax increase on consumer spending?" or "How does an increase in the money supply affect inflation?" The results of such analyses are interpretations of factual relationships, aiming to explain why certain economic phenomena occur and what the likely consequences of specific actions might be. These interpretations form the foundation upon which policymakers might then make decisions, but the positive analysis itself refrains from recommending a particular course of action. It highlights observed causality and correlation without prescribing what "should" be done.
Hypothetical Example
Consider a government agency tasked with understanding the housing market. A positive economic statement they might make is: "An increase in interest rates by one percentage point typically leads to a 5% decrease in new housing starts over the next six months."
To arrive at this statement, an economist would analyze historical housing market data, including past interest rate changes and corresponding fluctuations in new housing starts. They would employ statistical analysis to identify patterns and quantify the relationship, ensuring the statement is empirically verifiable. The statement describes a factual, testable relationship between two economic variables without expressing any opinion on whether a decrease in housing starts is good or bad. It simply states "what is likely to happen" based on observed trends and economic models.
Practical Applications
Positive economics is foundational to many areas of economic research and policy analysis. Governments and international organizations frequently utilize positive economic analysis to understand current economic conditions and anticipate future trends. For example, central banks like the Federal Reserve conduct extensive economic research to analyze the effects of monetary policy on unemployment rates or inflation, providing factual insights into the economy's state.3
Academic institutions and think tanks, such as the National Bureau of Economic Research (NBER), also heavily rely on positive economics to study diverse topics, including macroeconomics, microeconomics, labor markets, and international trade.2 Their research involves collecting and analyzing vast amounts of data to develop and test economic models that explain economic behavior and predict outcomes. Businesses use positive economic insights to forecast sales, analyze market trends, and understand the potential impact of changing prices or supply and demand dynamics. This fact-based approach allows for informed decision-making across various sectors by focusing on objectively verifiable economic relationships.
Limitations and Criticisms
While positive economics strives for objectivity, it faces several limitations and criticisms. One significant challenge lies in the inherent complexity of real-world economies, where isolating variables and establishing clear cause-and-effect relationships can be difficult due to numerous confounding factors. It is often argued that a complete separation between "what is" and "what ought to be" is practically impossible, as economists' choice of research questions, data, and methodologies can subtly reflect underlying values or policy interests.1
Critics also point out that even purely descriptive statements can be interpreted differently depending on one's perspective, and the selection of "facts" to analyze can be influenced by normative considerations. Furthermore, strictly adhering to positive economics might lead to an overemphasis on quantifiable aspects, potentially overlooking important qualitative factors or ethical dimensions that influence human behavior and economic outcomes. Some philosophical critiques suggest that the very act of observing and analyzing economic phenomena can influence those phenomena, thereby challenging the ideal of complete objectivity. Despite these critiques, positive economics remains a core methodological approach, with ongoing debates among scholars about its boundaries and relationship with normative considerations.
Positive Economics vs. Normative Economics
The primary distinction between positive economics and normative economics lies in their objectives and the nature of their statements.
| Feature | Positive Economics | Normative Economics |
|---|---|---|
| Focus | "What is" – factual, objective, testable statements. | "What ought to be" – subjective, value-based opinions. |
| Goal | To describe, explain, and predict economic phenomena. | To prescribe actions and make policy recommendations. |
| Verifiability | Statements can be proven or disproven by data. | Statements cannot be proven or disproven by facts. |
| Example | "An increase in the minimum wage leads to higher unemployment." | "The government should increase the minimum wage to reduce poverty." |
Confusion often arises because economists frequently engage in both positive and normative analysis. A positive economic study might explain the likely impact of a fiscal policy (e.g., government spending increasing gross domestic product), while a normative statement might argue whether that policy should be implemented based on societal goals. Positive analysis provides the factual basis for evaluating the potential outcomes, while normative analysis weighs those outcomes against a set of values or ideals.
FAQs
Is positive economics considered a science?
Yes, positive economics strives to be a science because it relies on objective observation, data collection, and the development of testable hypotheses to explain economic phenomena. Its goal is to analyze "what is" using methods similar to those in natural sciences.
Can positive economics be used for forecasting?
Absolutely. By identifying patterns and cause-and-effect relationships in historical data, positive economics provides the basis for forecasting future economic trends, such as predictions about GDP growth, inflation rates, or consumer spending. These forecasts are based on current data and economic models.
Does positive economics exclude opinions?
Positive economics aims to exclude personal opinions and value judgments from its analysis. Its focus is on factual statements and objective relationships that can be verified, allowing for a neutral description of how the economy works. However, the selection of research questions and data may subtly reflect underlying perspectives.
How does positive economics relate to economic policy?
Positive economics informs economic policy by providing factual analysis of the likely consequences of different policy choices. For example, it can predict how a change in interest rates might affect investment. However, positive economics itself does not make recommendations on which policies should be adopted; that falls within the realm of normative economics.
What is a positive economic statement?
A positive economic statement is a descriptive statement about the economy that can be proven or disproven using facts or data. For instance, "The national debt increased last quarter" is a positive economic statement because it can be verified by reviewing government financial records.