Positive, Normative, and … ?

Am I the only one who feels unfulfilled by the standard distinction between positive and normative economics?

I am gearing up to return to the classroom next week, to teach microeconomics to incoming masters students at the Georgetown Public Policy Institute. Anyone who’s experienced the first day of micro class knows what’s coming. After introducing myself and talking about the wonders of economics (which is, indeed, fun, useful, and enlightening), I will launch into the great positive vs. normative distinction.

In brief:

  • Positive is the science side of economics: understanding and predicting the behavior of individuals, firms, markets, economies, etc. In short, the part of economics in which we try to be physicists (or, sometimes, biologists).
  • Normative is the side of economics where we make value judgments, identifying policies as good or bad. In short, the part of economics in which we try to be philosopher-kings.

Both styles of economics are important, particularly in a public policy program. And drawing a careful distinction is vital, not least because of the many people in Washington (both economists and non-economists) who try to dress up their value judgments as science.

I have one problem with this distinction, however: it overlooks a great deal of what economists actually do.

Here’s one simple example: Congress is considering legislation that would create a cap-and-trade system for limiting emissions of greenhouse gases. Under that system, emitters would have to own enough carbon allowances to cover their emissions.

Congress is also considering using an auction to distribute some of these allowances. As a normative matter, I think that’s a great idea (but I wish they would auction even more).

Suppose that Congress decides that the auction should be designed in order to raise as much money as possible for the taxpayer.  (Which I also think is a great idea – again a normative judgment.)

Question: When economists work to design this auction, are they doing positive economics, normative economics, or something different?

It seems clear to me that these economists are not doing positive economics. After all, they are designing a system, not observing how it works.

However, I don’t think they are doing normative economics either. As I’ve structured the question, the economists aren’t engaged in any value judgments. Congress has made the relevant normative decisions (e.g., deciding to use an auction to maximize revenue and deciding how many allowances to give away). The economists are just trying to figure out how to accomplish that goal.

In this case, I think the economists are acting as engineers, not scientists or philosopher-kings. And based on my years in government, I can tell you that there is a lot of economic engineering going on.

So, I am tempted to tell my students (in direct contradiction to the textbook) that there are actually three kinds of economics: positive, engineering, and normative.

Which leads me to two questions for my illustrious readers:

  • Am I wrong here? Should I just shoe-horn my “engineering” idea into the normative category, as most textbooks do? (That’s a gain in simplicity and conformity, I suppose, and it reflects the reality that engineering can slip into normative; on the other hand, it loses the fact that some pieces of economic advice — e.g., how to maximize revenues — do not involve value judgments.)
  • If you think I’m right, what should this third piece of economics be called? So far, I’ve considered words like “Design”, “Engineering”, and “Prescriptive”. The last one isn’t very good (since normative conclusions could also be prescriptive), but at least it ends in “-ive”.

Thanks.

P.S. A few years ago, Greg Mankiw had a nice article on the dual role of macroeconomists as engineers and scientists; it appeared in the Journal of Economic Perspectives (here’s an ungated version).

16 thoughts on “Positive, Normative, and … ?”

  1. Carl Menger laid out this distinction in its original form — which made sense — and then later folks who didn’t get it came in and mucked it up. The mucked up version is usually the one taught by economists to their freshmen victims.

    Mengerian science lets us understand causal mechanisms which allow us to explain patterns of undesigned social order. (this is science, not normative values.)

    Mengerian science does not tell us what ends we should value or pursue. (these are normative values, not science.)

    There is your distinction.

    Now — as scientists — economists can tell you is what means will work and which won’t work — given your whatever ends or values you wish to achieve. (this is also science — applied science, the same sort of thing the folks at Los Alamos were involved with when making the A-bomb, given your ends, where is what science tells us will work and here is what science tell us won’t work.)

    A typical example of applied economic science involves explaining the causal consequences of price controls — e.g. price controls on energy, food, rent, interest rates, etc. Typically economists point out that the means selected will not achieve the values and ends aimed at by those who wish to use price controls for some particular moral end.

    So the answer to your question:

    “When economists work to design this auction, are they doing positive economics, normative economics, or something different?”

    Is simple, they are doing applied science.

    The interest thing is that in the midst of doing applied science, sometimes advances of economic understanding are achieved, e.g. thinking about making price controls on interest rates work better led to advancements in monetary and capital theory. Thinking about doing way with entirely with money and property led to the socialist calculation problem and the insights into information economics and the communicative function of both relative prices and profits achieved by Hayek, Mises, and and a number of Nobel Prize winners who were inspired by their work.

  2. Sorry, make that:

    “Now — as scientists — what economists can tell you is what means will work and which won’t work — given whatever ends or values you wish to achieve.”

  3. Note well that scientists do a lot of “engineering” in the midst of doing their science — read some history of science or some contemporary science journalism to get some understanding of just how inter-related these activities are.

    Ben Bernanke. Engineer or experimental scientist with a lot of failed or surprising experimental results to think about?

    On a different matter, when you say:

    “I think the economists are acting as engineers”

    It turns out that a lot of what economists do as “engineers” is work pointing out the that “bridge” politicians and humanities professors have designed as a contraption for transporting things across a river can’t possibly achieve the goal of functioning as a bridge.

  4. Good discussions of Menger’s original distinction can be found in Mises, Kirzner, Schumpeter, and Hayek. Max Weber’s own account seems to be derived in large measure from Menger — Weber and Mises developed their own explications of Menger’s distinction in conversation with one another.

    1. Hi Greg — Thanks for the thoughtful reply. I particularly like your point that work in “applied economics” can lead to insights in the pure science. I agree — that’s one of the reasons I think it’s helpful for economists to go out and touch the world (e.g., spend a couple years in Washington). One certainly learns a lot about where there holes are in the underlying science.

      Thanks.

      –Donald

  5. In law, there are three analogous categories: “question of law,” “question of fact,” and “mixed question of law and fact.” Carrying that into economics, perhaps one could say that designing an auction is a mixed question of positive and normative economics. Calling it a mixed question of the prior two categories is what judges and lawyers do, rather than creating a third category.

    If you want more detail on “mixed questions” in law, here is one…it’s not the loveliest prose on the web, but nevertheless it works pretty well. You can find other things on mixed questions of law and fact via Google, too. Here is the link:

    http://www.answers.com/topic/question-of-law-1

    Correct me if I am wrong, but it seems to me that financial engineers are still involved, in a mixed way, with value judgments…not their own, but at least the values of the person who assigned them job of designing the project or product they are desigining. And, more often than they do, a truly responsible financial engineer should say, “I do not believe in the values underlying this assignment, so I am going to find other work to do.” Obviously, our economy would all be a lot better off these days if a lot of financial engineers on Wall Street had voiced some ethical objections and decided to turn down assignments they were given. I would agree with you that they were just thinking like engineers, “just following orders,” to over-dramatize it, but I’m not sure we want to encourage that. I think we would do better to remind financial engineers that there are value judgments behind the orders they are given, and that even if they decide they are “just following orders,” they are making a moral decision.

    1. Hi Jon —

      The law analogy is helpful, thanks.

      Both you (financial engineers) and Greg (A-bomb) raise the issue of doing engineering on projects that some would judge to be, er, undesirable. That is a serious issue, but I’m not sure that’s the basis to do the nomenclature.

      One analogy I have in mind is building a bridge. The underlying science is physics, the actual design is engineering, and the decision to build and locate the bridge is politics. We may want the engineers to have some normative ideas in mind so they can register some objection (as citizens who happen to be well–informed on the topic not as engineers per se) in outlandish cases (wait a minute, that bridge doesn’t go anywhere …). In practice, though, we mostly want them to design a good bridge.

      Thanks.

      –Donald

      1. I worry about lulling people into thinking that the moral or policy choice is being made by someone else, and that it is really not their job to decide. So often, no one is making that choice, and people are just on moral auto-pilot.

        I would have no hesitation in teaching a class of physical engineers that they should always consider the moral implications of what they are doing, and speak up, or resign, when they felt a project was wasteful, immoral, dangerous, or what have you.

        You and I probably don’t really disagree on any of this, but are just emphasizing different aspects.

      2. Yup, I think we are in the same place. Pondering your framing, though, I am tempted to further divide the issues I have in mind: Science, Engineering, Normative Analysis Based on the Science in Question, and Broader Ethics. The latter two categories would distinguish between moral issues that directly involve the science (e.g., in economics all the talk about utility, consumer surplus, producer surplus, etc. leads naturally to some possible normative advice) vs. general ethics (e.g., if physicists were concerned about nuclear proliferation, which really isn’t a physics issue). Thanks!

  6. Hey Donald,

    I enjoyed this post. It brought me back to graduate school classroom debates on the philosophical foundations of the discipline. I enjoyed the other responses very much and am familiar with Menger’s work, generally. And without having the benefit of having read Carl Menger’s distinction (I think), I’ve always called it, “applied economics.”

    Confession time: I haven’t thought about this question since the early 1990s. Guess I’ve been too busy doing “applied economics” to think about this question. 😉 Thanks for sharing the ideas.

    Best,
    Scott

  7. It seems to me the role the economist plays is based on who is paying his fee. We have the great economist Lawrence Yun of the National Association of Realtors, who while an economist by education is in fact a cheerleader by occupation, and his mantra is “now is a great time to buy a house”, no matter what reality might portend. Then we have Helicopter Ben at the helm of the FED and his job is to be the doctor telling a dying patient that he will be feeling better real soon now.

    The difference for me between weathermen and economists, is I can actually understand the science and methodology behind the weather, while economics seems to be mostly voodoo with a little smattering of semantics and mathematics mixed into political theory and propaganda techniques, along with a whole lot of obfuscation and prestidigitation.

    I can ask a weatherman the chance of rain in 24 hours and get a meaningful number, I can ask an economist the chance of the dollar rising or falling in 24 hours and I will get 3 answers, starting with up, then going to steady and of course there is an outside chance it could go down as well.

    It might as well be magic if it weren’t so tragic, it is after all just putting a numerical face on humanity to hide the pain and pretend we really know what we’re doing.

  8. I am an engineering who spent a yead in a Econ PhD program. I can say from my time in the classroom that Economists’ attempt at behaving like Scientists is appalling. That the theory relies on hopelessly unrealistic assumptions is bad enough, but the mortal sin is to ignore any dat (or any student) that put the theory into question. Rational Expectation s and the rest are taught as unquestionable Gospel Truth, and woe upon the student (in this case, me) who attempts to critically examine the classroom material. As my advisor yelled at me at one point, “Have an open mind! Stop questioning things!”

    I suppose economic engineering is an appropriate term for what economists try to accompish outside the academic bubble. A strict comparison to Engineering is a bit misleading; true economics relies heavily on trying to understand and predict human behavior, which is alot more complicated than trying to understand and predict the behavior of electrons and materials. Ergonomics and industrial engineering come closer to economics, as considerations of human behavior are very important in these fields, which (broadly speaking) study man-machine interactions.

    Perhaps “Economic Designers” fits better, since (in my mind, at least) that term better captures the uncertainty and the human aspect. I tend to think of the “engineering” parts of my job as the more methodical/mathematica parts, and the “design” aspects of the job as those with more uncertainty and judgements calls. I admit, however, that it is a fuzzy distinction.

    1. Thanks Jeff. Those pesky humans do make it hard, particularly some of them study economics, which adds an additional complexity.

      Sorry your econ profs turner you off. I’ve always thought that Rational Expectations should be taught as, in essence, a thought experiment. It’s very valuable in those terms, since it shows you how far off your predictions can be if they are based on models that assume complete myopia (as many earlier models did). The hard part, of course, in getting to the next level and analyzing markets that have a mix of myopic and forward-looking people.

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  10. I would want more to be discussed in how the government can improve civil servants salaries based on nomative and positive advise.

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