Positive Economics

Background

Positive economics serves as a cornerstone of economic theory and analysis by focusing on the observation, description, and prediction of economic phenomena. Its key aim is to provide an objective framework for understanding how economies function without prescribing specific policies or outcomes.

Historical Context

The rise of positive economics can be traced back to the methodological debates of the early 20th century, most notably with contributions from economists such as John Stuart Mill and Milton Friedman. Mill emphasized the importance of distinguishing between what is empirical and what is normative. Friedman later reinforced this distinction in his 1953 essay, “The Methodology of Positive Economics,” arguing for the separation between positive and normative analysis to maintain scientific credibility.

Definitions and Concepts

Positive economics focuses on the following ideas:

Descriptive in nature, it describes and explains existing economic phenomena.
Predictive capacity, aiming to forecast the impacts of various policies without suggesting whether these outcomes are desirable.
Objective analysis, it avoids incorporating personal biases and value judgments.

Example: An analysis of the effects of a proposed tax increase on tobacco could predict potential effects on consumption rates and government revenue without declaring whether the tax itself is good or bad.

Major Analytical Frameworks

Classical Economics

In classical economics, positive economics provides the basis for examining how markets allocate resources, focusing on the forces of supply and demand.

Neoclassical Economics

Neoclassical economists utilize positive economics to build models about consumer behavior, market structures, and price mechanisms under various assumptions.

Keynesian Economics

Positive economics within Keynesian frameworks often involves empirical analyses of aggregate demand, fiscal policies, and their impacts on economic output and employment.

Marxian Economics

Positive economics in Marxian analysis may examine the economic relationships and outcomes within capitalist societies without evaluating the moral implications of capitalist structures.

Institutional Economics

Within institutional economics, positive analysis scrutinizes how institutions—the laws, habits, norms—impact economic performance.

Behavioral Economics

Positive economics in behavioral studies explores the ways psychological factors influence economic decisions and can predict behaviours in various economic settings.

Post-Keynesian Economics

Positive approaches here might involve empirical evaluations of monetary policy, distribution of income, and macroeconomic stability.

Austrian Economics

Austrian economists might employ positive methods to articulate the outcomes of capitalism and market processes without affirming value judgments on policies.

Development Economics

In development economics, positive economics is applied to assess the outcomes of various policy interventions in emerging markets to understand their roles in economic growth.

Monetarism

Positive economics under monetarism uses empirical data to assess the validity of controlling money supply as a tool for regulating economic activity.

Comparative Analysis

Positive economics contrasts sharply with normative economics, which incorporates ethical considerations and suggests policy recommendations based on value-laden judgments. A positive analysis might predict that imposing a minimum wage will increase unemployment among low-wage workers without claiming whether such a policy is right or wrong.

Case Studies

Analysis of the 2008 Financial Crisis to understand causes and predict long-term impacts.
Evaluating the economic impacts of trade tariffs between the U.S. and China from 2018 to present.
Predicting the effects of universal basic income programs in pilots across the world without evaluating the ethical implications.

Suggested Books for Further Studies

“The Methodology of Positive Economics” by Milton Friedman
“Economics: Principles, Problems, and Policies” by Campbell McConnell and Stanley Brue
“The Wealth of Nations” by Adam Smith

Normative Economics: Branch of economics that expresses value judgments about economic fairness or what the economy ought to be like.
Empirical Analysis: Use of data and observational evidence to assess economic theories, models, and predictions.
Economic Models: Structured frameworks used to represent economic processes and relationships in a simplified manner for analysis.
Forecasting: The process of making predictions about future economic conditions based on current and historical data.