PrintEconomists like to describe their discipline as a science. This seems odd to some people, who think of science as involving laboratories and experiments. However, any area of study that employs "the scientific method" as a mode of inquiry can be thought of as a science.
So, what is the scientific method? Well, there is no single broadly accepted definition, but there is a generally accepted framework. The scientific method is a structured method of attempting to answer questions about the world about us. In the case of economics, the "world" refers to the multitude of consumption and production decisions made by every person and firm every day.
The scientific method, as described here, has four basic steps:
- Observe
- Hypothesize
- Test
- Repeat step 1
We start by observing something in our environment that leads us to ask a question. Questions such as: Will a ball float in water? Will price controls lead to shortages? Will smoking cause you to die earlier? To attempt to come to an answer, we first need to ask the question in the form of a "testable hypothesis." Put another way, try to frame the question in such a way as to be able to test it and get a yes/no answer. Actually, we generally frame the questions so that the answer will be "no" or "not no." Note that "not no" is not the same thing as yes. "Not no" can be either yes, or maybe, or we don't know, or the answer is not clear. But we do want a question that can have a clear answer of "no."
This question is called a "hypothesis." We need to test the hypothesis with an experiment: some set of actions that will allow us to answer the hypothesis. In science-speak, we write the question as a "null hypothesis," so looking at our first question from above, I will state the null hypothesis as "this ball will float in water." We then perform some set of actions to test the hypothesis. In this case, there is a simple test: place the ball in water. If it sinks, we can answer "no" to the null hypothesis, or put another way, we can reject the null hypothesis. If the object does not sink, we do not answer yes, but instead we "fail to reject" the null hypothesis.
Notice that we are not trying to prove something to be true, but we are, in fact, trying to prove it to be false. This is the key aspect of the scientific method: we need to have a hypothesis that is testable and falsifiable. If something is not falsifiable, it cannot be tested scientifically. In science, nothing is proven, but many things are disproven. Some hypotheses, such as Newton's theory of gravity, have survived the test of falsifiability for centuries, and as such, we generally accept them to be "true," but, in reality, they are just yet to be disproven, after several hundreds of years of many smart people trying.
The above was a rather long-winded attempt by me to explain why economics is a science - a science that studies an aspect of a human society, which is why it is called a "social science." It is a science because economists, when they ask questions, strive to employ the concept of a testable, falsifiable null hypothesis. Unfortunately, it is much more difficult to do experiments. For example, we cannot impose a price control in one town and not in another, and observe the difference. What we can do is gather data from the world around us, and try to define "natural experiments" to help us test our hypothesis. So, for instance, we can look at different minimum wages in different states and try to ask questions about the effect of raising the minimum wage on youth unemployment. Unfortunately for us, we can not do " controlled experiments," that is, hold everything else constant and change only one variable. When dealing with society and natural experiments, there are many uncontrolled, indeed, uncontrollable variables, which can make hypothesis testing difficult and controversial.
So, what kinds of questions do economists ask? Well, for the most part, they try to ask "positive" questions. A positive question is one that can be falsifiable, or put more simply, has a yes/no answer. Think of a positive question as a "how is the world" question. A different kind of question does not ask how the world is, but how it "should be." These are referred to as "normative" questions.
For example, speaking again about minimum wage laws, a positive question would be "Do higher minimum wages cause higher rates of youth unemployment?", whereas a normative question might be "Are higher minimum wages better for young workers?" The first of those two questions should have a testable answer: yes or no. The answer to the second question hinges upon the definition of "better." We often hear the phrase "There oughtta be a law," or maybe, "We should have higher minimum wages." These are political questions, based upon values-based questions that are not falsifiable. I am not saying that asking these types of questions is wrong or incorrect; clearly, this is what the entire field of politics is about. However, these are not the kinds of questions that we like to ask in economics. Economists are people who see themselves as dispassionate scientists, attempting to rationally undercover the nature of the universe. At least, that's the goal most of us strive to, and in this course, it is the method of explanation I will attempt to employ.
Stated simply, I'm here to try to help you see how things are, and not how they should be.
A positive question is a "scientific" question that you can test it, you can look at the data, build and economic model, ... and eventually conclude if it is correct or not. However, a normative question/sentence is more like an opinion, that you can agree or disagree. You can't really scientifically test it.
The following video (3:59) explains the difference between positive and normative economics.
[Music]
Narrator: Hi everyone! Day four, Quick Econ. In this video we're going to look at the difference between positive and normative economics. When speaking about economic hypotheses, the way you phrase your statement is actually a pretty big deal. And in economics we can broadly define a statement as positive or normative economics. Now when you think of the phrase positive, you might think of something that's good, or something that's true, or something that you agree with. That's actually not the case. A positive economic statement is just a simple statement about what is, was, or will be. It's often written in an if-then form. If A happens, then B will follow.
Now this is important because it's written or spoken in a way that allows it to be tested with data. We can use economic data. We can look at the numbers to see if the statement is true or false. And what's important to know is that it's not always true. A positive statement could be a false statement. Normative statements, on the other hand, are values, opinions, or judgments. We ask do we think this is good or bad? And we can look for phrases like, I “think” we should do this, we “ought” to do that, or everyone “should” do this. It's a statement of opinion that cannot be tested to be true or false.
Now the easiest way to learn about positive versus normative is to just look at a couple of examples. So, examine the following statement. On average people tend to shop at Walmart more after they get a pay raise. Now you might look at that statement and say, well that's probably false. And maybe it is, but it's still a positive statement. We can look at people's income data, we can look at shopping data, and we can see is this statement true or false?
Now the following statement, everyone should shop at Walmart, that's a normative statement. We cannot test that with data. You look at that word, and you see should. That's an opinion. We can't prove that true or false. Now a big pitfall with positive and normative is that we often make the mistake of looking at a normative statement and agreeing with it and therefore say that it's a positive statement.
Look at the following example, rich people need to pay more taxes. Now many of you would say sure, that's true. I agree with that. That's positive economics. But there's some problems with that statement. Number one, the word rich is poorly defined, and also the way it's written we can't prove or disprove it. Rich people need to pay more taxes. Well, should they? Shouldn't they? Well we can't prove that. It's normative, even though you may agree. Now if you were to rewrite that statement to say if families with incomes over $250,000 per year paid higher taxes overall, tax revenues would increase. That is a positive statement. You can look at what happens to tax rates and tax revenues. You can see the relationship over time. It's a statement that you can test with data.
Now in reality, of course we generally prefer positive statements because we like to see if our hypotheses can be backed up with real life data and real life numbers. But normative statements do play a role in society, especially in legislation where we're examining policies with the goals of fairness in mind, and of course fair is a normative word.
Property Rights
When we start talking about market systems and trade, we will make an assumption that people have the legal right to trade something for something else, and to do as they wish with the goods they have traded for. That is, if you have money you can trade it for goods that you use in some way that you derive utility from, or if you have a good, you may sell it in exchange for either money or other goods. Of course, the good that most of us sell most frequently is our time and set of skills, sold to an employer in exchange for a salary.
This introduces the concept of "property," the stuff that you sell and/or use. A property right has two separate and specific parts. For something to be a person's property, it is necessary that both parts of the property right are present.
For somebody to hold a property right, they have to have both Use Rights and Disposal Rights. That is, for something to be considered a person's property, you have to have the right to use it as you please, and the right to exchange it for something else, or to dispose of it some other way, which can include destroying the good in question.
One confusing use of the term "property" is in the case of "public property," for which a specific individual may or may not have use rights, and definitely does not have disposal rights. There is a longer write-up on the topic of property rights on pages 32-36 of the text, which I recommend you read. Gwartney adds a third consideration, one concerning legal protection against unauthorized use, but I see this as simply an extension of the "use right" part of the definition.