What Is Positive Economics?

What Is Positive Economics?

Let me explain positive economics to you directly: it's an approach in economics that sticks to objective analysis, focusing on what has happened and what's happening now in an economy to make predictions about the future.

You should know it's different from normative economics, which brings in value judgments to shape those predictions.

Key Takeaways

Here's what you need to grasp: positive economics is all about objective facts and what's actually occurring, with conclusions you can test using data.

It stands apart from normative economics, which is more about opinions, but they can complement each other in policy development.

Understanding Positive Economics

At its core, positive economics builds theories from fact-based looks at causes and effects.

I often hear it called 'what is' economics because it deals with factual determinations, while normative is 'what should be'.

History of Positive Economics

This goes back to the 19th century when economists like John Neville Keynes and John Stuart Mill first separated 'what is' from 'what should be'.

Keynes stressed logic and methodology, and Mill mixed economics with philosophy, using data like supply and demand relationships instead of value views.

They backed theories with factual evidence, and later, Milton Friedman adapted this, pushing monetarism and criticizing fiscal policy's role in the Great Depression.

Important Note

While combining positive and normative economics helps in policy solutions, remember that positive economics is crucial for investments since it relies on hard facts.

Testing Positive Economic Theories

You can verify positive economics conclusions with data—for instance, predicting more savings at higher interest rates based on past behavior.

This is objective, unlike normative statements, and news often mixes both.

Positive theory supports normative judgments, like how printing money affects inflation, but it doesn't prescribe exact policies.

Together, they give a full view of policies, blending facts with opinions.

Advantages and Disadvantages of Positive Economics

Positive economics has clear upsides and downsides, so let's break them down.

Advantages

It's grounded in objective data, not opinions, so claims are backed by facts like how interest rates influence borrowing.

Without value judgments, it lets policymakers craft targeted measures, such as the Fed lowering rates to avoid recession.

It helps individuals avoid emotional decisions in finances, leading to smarter choices based on data.

Disadvantages

Not everyone sticks to facts; emotions often drive choices, like ignoring savings advice during weak economies.

Data doesn't guarantee perfect solutions since economics isn't exact, and other factors can alter outcomes.

It doesn't fit everyone equally—raising rates helps lenders but hurts borrowers, especially those in tough spots.

Real-World Example of Positive Economics

Take the Fight for 15 movement pushing for a $15 minimum wage; that's normative at first, with debates on whether it's good or bad.

But studying effects, like a Harvard Business Review comparison of California and Texas, shows positive economics: higher wages led to more workers but fewer hours per worker to avoid benefits costs.

The data is objective, but policy suggestions from it turn normative.

What Is Positive Economics in Simple Terms?

Simply put, it's objective economic analysis of past and present to predict future, using tangibles like inflation or unemployment rates.

What Are the Differences Between Positive and Normative Economics?

Positive relies on objective data for 'what is', while normative uses subjective judgments for 'what should be'.

What Is a Positive Versus Normative Statement?

Positive statements are testable and objective; normative ones are subjective and opinion-based.

What Are Examples of Normative Economics?

Things like arguing for higher corporate taxes based on earnings data, or opinions on minimum wage from living costs—welfare economics by thinkers like Abram Bergson and Kenneth Arrow fits here.

The Bottom Line

Economics mixes art and science, with positive being objective and verifiable, normative opinion-based.

No society runs purely on positive economics, but blending both is often best for policy solutions.