The Economy & You 26: Economic Methods
In the study of economics, there are two approaches that are used to ask and answer questions posed to economists. The first approach tries to understand the behavior and operation of economic systems without making judgments or expressing opinions about whether the outcomes are good or bad. This is considered positive economics. The second approach analyzes the outcomes of economic behavior, provides an opinion whether they are good or bad, and provides possible courses of action. This is considered normative economics.
Normative economics or policy economics deal with questions like: should the government subsidize certain types of manufacturing over others; should Medicare and Medicaid be means tested; and should the U.S. place tariffs on Chinese imports to address the reluctance of China allowing their currency to float?
To be certain, many normative economic questions involve positive economic questions. To know whether a specific economic decision or policy is a good one, we first must determine if such a policy can be implemented and what the likely consequences will be before an evaluation can take place.
Some will argue that positive economic analysis is nearly impossible. Economists and analysts all enter into the process with biases that will influence their work. It can even be said that the questions they choose to analyze and answer themselves are shaped by ideological views (whether political or moral). Regardless, it is important to note that economists who attempt to answer positive economic questions are attempting to provide research and analysis that is devoid of bias to the best of their ability.
Positive economics can be divided into two main areas: descriptive economics and economic theory. Descriptive economics is the compilation of data that describe facts ad events. One example of such data is the Statistical Abstract of the United States which is published by the Department of Commerce every year and helps to describe many features of the national economy. These data and much more can be found on the internet and more specifically at the Bureau of Labor Statistics (www.bls.gov).
Economic theory attempts to analyze the data, interpret it, and provide generalizations about the data. Economic theory is a set of statements regarding the cause, effect, action or reaction of an economic system. One of the most basic economic theories is the law of demand. When the price of a good or service rises, people tend to buy less of it. When the price of a good or service falls, people tend to buy more of it. Economic theory arises from both statistical data and observation of human behavior. As with any science, whether social or physical, scholars construct a model to state a theory. The theory is then tested to determine its strength or validity.
It is these basic methods that economists and economics students employ to describe, understand, analyze, and evaluate our economy and those around the world. Economic methods are important to understand because when statements are made by economists and government leaders, we as citizens must be able to distinguish whether a statement being made is a positive economic statement or a normative economic statement. Saying that Wisconsin’s unemployment rate has fallen is a positive statement. Saying that the Governor’s economic policies have led to the decline of the unemployment rate is a normative statement. It is important for people to know what a statement of fact is (positive) and what a statement of opinion is (normative). In addition, you will need to understand common assumptions and pitfalls that are made when describing economic theories and models. This will be a topic for a future article.