In the philosophy of economics, a descriptive or positive statement is an assertion about facts of the world, while prescriptive or normative statements express value judgments. The former describe the world as it is, while the latter talk about the world as it should be. [1] The methodological basis for positive/normative distinction is rooted in the fact-value distinction in philosophy.
Economics is often divided into positive and normative economics. Positive economics focuses on the description, quantification and explanation of economic phenomena. [2] Normative statements about economics often take the form of discussions about fairness and what the outcome of the economy or goals of public policy ought to be, [3] as well as prescriptions regarding rational choice, as studied in decision theory.
Positive economics as a science concerns the investigation of economic behavior. [4] It deals with empirical facts as well as cause-and-effect behavioral relationships and emphasizes that economic theories must be consistent with existing observations and produce precise, verifiable predictions about the phenomena under investigation. [5] [6]
Examples of positive economic statements are "the unemployment rate in France is higher than that in the United States," or "an increase in government spending would lower the unemployment rate." Either of these is potentially falsifiable and may be contradicted by evidence. Positive economics as such avoids economic value judgments. For example, a positive economic theory might describe how money supply growth affects inflation, but it does not provide any instruction on what policy ought to be followed.
An example of a normative economic statement is as follows:
This is a normative statement, because it reflects value judgments. This specific statement makes the judgment that farmers deserve a higher living standard and that family farms ought to be saved. [3]
Some earlier technical problems posed in welfare economics have had major impacts on work in applied fields such as resource allocation, public policy, social indicators, and inequality and poverty measurement. [7]
Since its inception as a discipline, economics has been criticized for insufficiently separating prescriptive from descriptive statements [8] and also for excessively separating prescriptive from descriptive statements. [9]
The field's current emphasis on positive economics originated with the positivist movement of Auguste Comte and with John Stuart Mill's introduction of Hume's fact-value distinction to define the science and art of economics in A System of Logic. [10] which was introduced into the field by John Stuart Mill [11] and was further developed by John Neville Keynes in the 1890s. [12] John Neville Keynes's The Scope and Method of Political Economy defined positive economics as the science of "what is" as compared to normative economics, the study of "what ought to be". [12] Keynes was not the first person to make these distinction between positive and normative economics but his definitions have become the standard in economics teaching. [10] The scientific or positive aspects of economics were emphasized by many early-to-mid 20th century economists in an attempt to prove economic theories could answer questions with the same scientific methodology as the physical sciences. [6]
The fierce commentary of Lionel Robbins in the 1930s, who argued that normative economics was wholly unscientific and should therefore be cast out of the field, were particularly influential for a time. [4] Robbins's 1932 "Essay on the Nature and Significance of Economic Science" argued economics should take as its subject matter attempts to achieve a given end with limited resources, and should not take a point of view on which ends should or should not be pursued. [13] Robbins was instrumental in promoting the fact-value distinction in economics and insisting that ethical or value judgments should not be a part of the discipline, [10] and by the 1950s some economists even asserted that Arrow's impossibility theorem proved any attempts to construct normative standards in economics were doomed to fail.
Paul Samuelson's Foundations of Economic Analysis (1947) lays out the standard of operationally meaningful theorems through positive economics. Positive economics is commonly deemed necessary for the ranking of economic policies or outcomes as to acceptability. [14]
By contrast, Friedman in an influential 1953 essay emphasized that positive and normative economics could never be entirely separated, because of their relationship with economic policy. Friedman argued about economic policy are primarily due to an inability to agree about the likely consequences of a piece of legislation. As economics developed, Friedman believed that it would become increasingly possible to derive undisputed results about positive economic statements and that this would help to make clear judgments about the best ways to achieve normative goals. [6] According to Friedman, the ultimate goal of a positive science is to develop a "theory" or "hypothesis" that makes meaningful predictions of a phenomenon that is not yet examined. Friedman states that sometimes it is a ""language" that designed to promote "systematic and organised methods of reasoning" and in part, "It is a body of substantive hypotheses designed to abstract essential features of complex reality." [6] [15]
The logical basis of such a relation as a dichotomy has been disputed in philosophical literature. Such debates are reflected in discussion of positive science. Hilary Putnam has criticized the foundation of the positive/normative dichotomy from a linguistic perspective, arguing that it is not possible to completely separate "value judgments from statements of facts". [10]
Many normative value judgments are held conditionally, to be given up if facts or knowledge of facts changes, so that a change of values may be purely scientific. [16] Welfare economist Amartya Sen distinguishes basic (normative) judgments, which do not depend on such knowledge, from nonbasic judgments, which do. [17]
Bryan Caplan and Stephen Miller argue the dichotomy in economics has been greatly overstated, in that many policy disagreements often described as value judgments are simply disagreements about facts. They cite evidence showing that descriptive statements have a strong effect on policy prescriptions, and that economics education tends to substantially affect both. [18]
The Austrian school is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals along with their self interest. Austrian-school theorists hold that economic theory should be exclusively derived from basic principles of human action.
Economics is a social science that studies the production, distribution, and consumption of goods and services.
Milton Friedman was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the complexity of stabilization policy. With George Stigler, Friedman was among the intellectual leaders of the Chicago school of economics, a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago that rejected Keynesianism in favor of monetarism until the mid-1970s, when it turned to new classical macroeconomics heavily based on the concept of rational expectations. Several students, young professors and academics who were recruited or mentored by Friedman at Chicago went on to become leading economists, including Gary Becker, Robert Fogel, and Robert Lucas Jr.
Sir John Richard Hicks was a British economist. He is considered one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economics were his statement of consumer demand theory in microeconomics, and the IS–LM model (1937), which summarised a Keynesian view of macroeconomics. His book Value and Capital (1939) significantly extended general-equilibrium and value theory. The compensated demand function is named the Hicksian demand function in memory of him.
Arthur Cecil Pigou was an English economist. As a teacher and builder of the School of Economics at the University of Cambridge, he trained and influenced many Cambridge economists who went on to take chairs of economics around the world. His work covered various fields of economics, particularly welfare economics, but also included business cycle theory, unemployment, public finance, index numbers, and measurement of national output. His reputation was affected adversely by influential economic writers who used his work as the basis on which to define their own opposing views. He reluctantly served on several public committees, including the Cunliffe Committee and the 1919 Royal Commission on income tax.
In welfare economics and social choice theory, a social welfare function—also called a socialordering, ranking, utility, or choicefunction—is a function that ranks a set of social states by their desirability. A social welfare function may yield several possible outcomes; each person's preferences are combined in some way to determine which outcome is considered better by society as a whole.
Monetary economics is the branch of economics that studies the different theories of money: it provides a framework for analyzing money and considers its functions, and it considers how money can gain acceptance purely because of its convenience as a public good. The discipline has historically prefigured, and remains integrally linked to, macroeconomics. This branch also examines the effects of monetary systems, including regulation of money and associated financial institutions and international aspects.
A prescriptive or normative statement is one that evaluates certain kinds of words, decisions, or actions as either correct or incorrect, or one that sets out guidelines for what a person "should" do.
Philosophy and economics studies topics such as public economics, behavioural economics, rationality, justice, history of economic thought, rational choice, the appraisal of economic outcomes, institutions and processes, the status of highly idealized economic models, the ontology of economic phenomena and the possibilities of acquiring knowledge of them.
Social choice theory is a branch of welfare economics that analyzes methods of combining individual opinions, beliefs, or preferences to reach a collective decision or create measures of social well-being. It contrasts with political science in that it is a normative field that studies how societies should make decisions, whereas political science is descriptive. Social choice incorporates insights from economics, mathematics, philosophy, political science, and game theory to find the best ways to combine individual preferences into a coherent whole, called a social welfare function.
The welfare definition of economics is an attempt by Alfred Marshall, a pioneer of neoclassical economics, to redefine his field of study. This definition expands the field of economic science to a larger study of humanity. Specifically, Marshall's view is that economics studies all the actions that people take in order to achieve economic welfare. In the words of Marshall, "man earns money to get material welfare." Others since Marshall have described his remark as the "welfare definition" of economics. This definition enlarged the scope of economic science by emphasizing the study of wealth and humanity together, rather than wealth alone. In his widely read textbook, Principles of Economics, published in 1890, Marshall defines economics as follows:
Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being.
Economic methodology is the study of methods, especially the scientific method, in relation to economics, including principles underlying economic reasoning. In contemporary English, 'methodology' may reference theoretical or systematic aspects of a method. Philosophy and economics also takes up methodology at the intersection of the two subjects.
Milton Friedman's book Essays in Positive Economics (1953) is a collection of earlier articles by the author with as its lead an original essay "The Methodology of Positive Economics." This essay posits Friedman's famous, but controversial, principle that assumptions need not be "realistic" to serve as scientific hypotheses; they merely need to make significant predictions.
Lionel Robbins' Essay sought to define more precisely economics as a science and to derive substantive implications. Analysis is relative to "accepted solutions of particular problems" based on best modern practice as referenced, especially including the works of Philip Wicksteed, Ludwig von Mises, and other Continental European economists. Robbins disclaims originality but expresses hope to have given expository force on a very few points to some principles "not always clearly stated"
In economics, distribution is the way total output, income, or wealth is distributed among individuals or among the factors of production. In general theory and in for example the U.S. National Income and Product Accounts, each unit of output corresponds to a unit of income. One use of national accounts is for classifying factor incomes and measuring their respective shares, as in national Income. But, where focus is on income of persons or households, adjustments to the national accounts or other data sources are frequently used. Here, interest is often on the fraction of income going to the top x percent of households, the next x percent, and so forth, and on the factors that might affect them.
Economic justice is a component of social justice and welfare economics. It is a set of moral and ethical principles for building economic institutions, where the ultimate goal is to create an opportunity for each person to establish a sufficient material foundation upon which to have a dignified, productive, and creative life.."
In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good." If the conditions of scarcity did not exist and an "infinite amount of every good could be produced or human wants fully satisfied ... there would be no economic goods, i.e. goods that are relatively scarce..." Scarcity is the limited availability of a commodity, which may be in demand in the market or by the commons. Scarcity also includes an individual's lack of resources to buy commodities. The opposite of scarcity is abundance. Scarcity plays a key role in economic theory, and it is essential for a "proper definition of economics itself".
"The best example is perhaps Walras' definition of social wealth, i.e., economic goods. 'By social wealth', says Walras, 'I mean all things, material or immaterial, that are scarce, that is to say, on the one hand, useful to us and, on the other hand, only available to us in limited quantity'."
Mathematical economics is the application of mathematical methods to represent theories and analyze problems in economics. Often, these applied methods are beyond simple geometry, and may include differential and integral calculus, difference and differential equations, matrix algebra, mathematical programming, or other computational methods. Proponents of this approach claim that it allows the formulation of theoretical relationships with rigor, generality, and simplicity.
Macroeconomic theory has its origins in the study of business cycles and monetary theory. In general, early theorists believed monetary factors could not affect real factors such as real output. John Maynard Keynes attacked some of these "classical" theories and produced a general theory that described the whole economy in terms of aggregates rather than individual, microeconomic parts. Attempting to explain unemployment and recessions, he noticed the tendency for people and businesses to hoard cash and avoid investment during a recession. He argued that this invalidated the assumptions of classical economists who thought that markets always clear, leaving no surplus of goods and no willing labor left idle.
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