Thursday, November 14, 2013

Positive Economics by Rick Kelo

Positive Economics
By Rick Kelo

I'd like to introduce you to an idea I think will change the way you look at most of the discussions about the economy that come up from time to time.  It’s the idea of Positive Economics.  
Think about the economic things that come up in the news and discussions: minimum wage, health care, the recession, wartime spending, taxes.  Well discussions about every one of those areas benefit from exposure to Positive Economics.  
Positive Economics is the half of economics that focuses on cause & effect relationships.  
Then there's the opposite of Positive Economics.  With Google at everyone's fingertips the majority of discussions about an economic topic center on what's called "Normative Economics".  The world the way you THINK it should be, not necessarily the way it really is.  Normative Economic statements are subject to each person's individual opinions, values, and goals.  
Positive Economics focuses on understanding the world the way it really is; not the way you think it is or should be.  Positive Economics attempts to understand how a system operates rather than pass judgment on it.
An example we can all relate to: We've all seen someone (but not us of course), who's read a blog post or news article they didn't like, then went to the internet and searched for some factoid to disprove the thing they didn't like.  That is the practice of Normative Economics: searching for that factoid (a piece of Positive Economics) to validate the Normative conclusion they held beforehand.
The problem with that approach: In order to reach the correct conclusion by anything other than dumb luck we must use Positive Economics first.  One must see the world the way it really is; not the way their set of personal biases tells them it "should be."
The implication: This does not mean there is no place for Normative Economics, of course it doesn't.  After all without normative judgments how would we know if that politician was suggesting a good tax rate or a bad tax rate?  Of course someone like me would tell you that a point on a graph can't be good or bad, but then you'd tell me that the last 5 years the economy has been "bad" right?  But if the economy is "bad" then you've already made your own value judgment that it should be some other different way and that something must be done to force the economy to be a "good" economy... whatever that means to you.  
Even in that example we could all agree on (that the economy has recently been "bad") can you see the slippery slope?
Normative Economics unfortunately rarely is used to describe our ideal world.  It’s usually abused as a way to tap dance around the truth of a matter by presenting only a couple isolated factoids to "prove" the opinion someone already had beforehand.  If we want to ground our views in reality we need to first learn the reality of the matter, and then decide within reality what would be a "good" outcome or "bad" outcome.  Going at things the opposite way replaces the truthfulness of mathematics with the subjectiveness of emotion.

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