NAME : VIGNES A/L GOPAL KRISHNA (EHA 100016)

COURSE NAME : ADVANCED MICROECONOMICS

LECTURER’S NAME : ASSOC. PROF. DR. FATIMAH KARI.

THE ROLES OF POSITIVE AND NORMATIVE ECONOMICS IN SCHOLARLY RESEARCH.

The flow of microeconomics and macroeconomics have shaped up the

genealogical evolution and holistic approach of economics. The beauty of economics can

only be realized through the avenues of economics,positive and normative analysis.. The

credit should goes to Samuelson (1947), Friedman (1966), a prominent economic

scholar, Keynes (1890) , Hausman & McPherson (2006) and Caplin & Schotter (2008)

for bringing in various definitions of positive and normative approach into the field

of economics. To most of the economists including Milton Friedman , positive

economics lies on the stage of value free economics that is more objective whereas the

normative approach touches on the policy based economics that is more subjective in

illustrating the economic phenomena and theories. The former and latter statements can

be supported by Wetzstein (2005) , and Henderson & Quandt (1958, 1971), Miller (2009)

. In simple term, positive statements refer to “what is” and normative statements refer to

“what ought to be”. The mixture of positive and normative economics are crucial in

designing the overall system of economics that comprises of microeconomics,

macroeconomics and evolutionary meso economics. The validity of the latter statement

can be proven via Nelson (2008) and Dopfer et al.(2004), and Powell & Wakeley

(2003). By referring to the views that were brought out by some of the economics

discussants, positive economics refers to ‘unchangeable views” which rely on the

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economic facts, whereas normative economics refers to the “changeable views” among

the economic agents that can evolve over the time and it boils down the moral aspects of

economics. In general, positive economics can be closely related to the deductive

approach in the research because the formation of hypothesis is derived from economic

theories to test the validity of positive economics. The latter statement was highly

supported by Wetzstein (2005) and the degree of accuracy can be proven by adopting

various econometrics tools in research. The discussions on the role of positive and

normative economics will be captured in the next strand of this study.

Both positive and normative approaches are crucial in framing out and

evaluating the core findings and conclusions of the research papers. Normative

economics can be treated as an important benchmark in identifying the descriptive

function of positive economics. Positive economics describes and explains the actual

conditions that happened in economic sectors as mentioned by enormous number of

researchers. Positive analysis can be used by the economic scholars to indentify the gap

of convergence and divergence between economic theories and realities. For example,

metcalfe’s law in terms of economics refers to positive connectivity between the value of

products and the number of consumers. The above statement refers to positive statement

because it has inferred the actual market transaction in the competitive output market.

This positive statement can be measured by using regression method. The value of a

product should be measured by incorporating the level of household income, households

preferences together with the number of consumers and the latter statement refers to

normative analysis. Will the metcalfe’s law valid in reality?” refers to positive question

and the answer for the question can be yes or no. It depends on the mathematical tools

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and normative analysis too. People can provide various comments and opinions based

on the above question and this is known as a normative analysis. In general, normative

analysis provide platform for the economists to debate on certain economics issues which

may lead to an alternative method or policy that can influence the level of decisions

made at the microeconomics level. In the competitive output market, firms tend to

maximize their profits by adopting the profit maximizing rule, MR=MC and this refers

to positive statement. From the theoretical perspective, the neoclassical view on the

proftt maximizing rule might be true, but, in reality, the profit maximizing rule may lead

to a wrong conclusion. Some economists believe that risk aversion should be included in

the profit maximizing rule (Ann, 2000) This refers to the normative statement that can

vary over time among the economists or economic agents. By referring to the modified

version of profit maximizing rule, I disagree with the statement that was brought out by

Wetzstein (2005). The statement is as below:-

“Normative statement is a value judgment that cannot be tested.”

In some special cases, the normative statements can also be measured by using suitable

tools. Modified version of profit maximizing rule can be a part of evolutionary economics

because it takes in the nature of firms operations into the consideration. “Consumers and

firms can get perfect information in perfect competitive market” and this statement refers

to positive economics because it is a fact, but, economic reality has violated the latter

positive statement because of asymmetric information (unequal spread of information

among the economic agents). So, in this case, the positive statement is totally wrong..

The statement that was brought by Wetzstein (2005) can be fully accepted in most of the

time. In other words, normative analysis can be used as a tool to identify and monitor

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the disparities of economic assumptions in the positive approach. In this context,

normative analysis plays an important role in capturing Keynes (1936, 1964) and Ann’s

statement. Keynes’s statement is as below:-

“ The theory of economics does not furnish a body of settled conclusions immediately

applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a

technique of thinking which helps its possessor to draw correct conclusions”.

Ann’s statement is as below:-

“Economic assumptions/theories can change over time”.

Rajah Rasiah (2011) has advocated the normative side of economics to connect the

market competition with the concept of creative destruction that was brought out by

Joseph Schumpeter. In my point of view, I can seen the transition from microeconomics

to macroeconomics through meso trajectory (innovation) which was proposed by Dopfer,

et.al (2004).

As mentioned earlier, the scope of economics is too broad and it is possible to

look at the positive and normative analysis from the macroeconomic perspective. From

the macroeconomic perfective, it can be infer that there is a negative connectivity

between inflation and unemployment rate through the utilization of Philips Curve and

this refers to the positive statement. This case is true until the emergence of stagflation

(continuous rise in the price level and unemployment level). The former and latter

statements show that the positive statements from the macroeconomic perspective can

change over time only if there is a shock in economic phenomena.

Based on voluminous discussions on the role of positive and normative sides of

economics, it can be inferred that the normative analysis is just an extension from

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positive analysis which can contribute to qualitative and quantitative avenues. In my

point of view, I feel that positive economics is not a stand-alone device and it should be

supported by normative economics in research. In reality, very few scholars have

concentrated on the genesis of positive and normative economics in research such as

Keppler (1998) , Reisen (1997) and Powell & Wakeley (2003). The combination of

positive and normative analysis in research will lead to a backward-forward approach,

which can call back all the economic theories and the economists can forward the

theories to the process of expanding the value judgements in certain economic issues. By

referring to the statistical part of economics (econometrics), I can say that the degree of

correlation between the positive and normative economics is quite high and this can

infer that the dependency rate between the two sides of economics is quite high. The gap

of convergence between positive and normative economics can be increased via the

concept of rationality in the competitive market and once again it depends on the value

that households consider in the process of selecting suitable goods and services. The role

of positive and normative economics is crucial in designing the complete set of research

and economic system.

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REFERENCES

Ann, C. T. (2000). An introduction to History of Economic Thought. Malaysia : Pustaka Prinsip Sdn. Bhd.

Brue, S.L. & Grant, R.R. (2007). The History of Economic Thought(7th edition). United States: Thompson South Western.

Caplin, A. & Schotter,A (2008).The Foundations of Positive and Normative Economics: A Handbook, Oxford University Press.

Dopfer, K., Foster, J. & Potts, J. (2004). Micro-meso-macro. Journal of Evolutionary Economics, 14, 263-279.

Friedman, M. (1966). The Methodology of Positive Economics. Chicago : University of Chicago Press.

Hausman, D.M. & McPherson, M. S. (2006). Economic Analysis, Moral Philosophy, and Public Policy.

Henderson, J. M. (1958, 1971). Microeconomic theory: Mathematical Approach, United States :McGraw- Hill.

Keppler, J.H. (1998). The genesis of ‘positive economics’ and the rejection of monopolistic competition theory: a methodological debate. Cambridge Journal of Economics. 22, 261-276.

Keynes, J.N. (1890). The scope and method of Political Economy. Kitchener :Batoche Books.

Keynes,J.M. (1936, 1964). The General Theory of Employment, Interest and Money. Britain: Macmillan and Company Limited.

Miller, R.L. (2009). Economics Today: The Micro View (14th Edition).

Nelson, R.R. (2008). Economic Development from the Perspective of Evolutionary Economic Theory. Qxford Development Studies, 36(1), 9-21.

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Powell, J.H. & Wakeley, T.M. (2003). Evolutionary concepts and business economics towards a normative approach. Journal of Business Research, 56, 153-161.

Rajah Rasiah. (2011, Jan). Regulating Complex and Diverse Markets. Powerpoint presentation at the Conference on Modernizing Business Regulation, Subang Jaya, Malaysia.

Reisen, H. (1997). Liberalizing Foreign Investments by Pension Funds: Positive and Normative Aspects. World Development, 25(7), 1173-1182.

Samuelson, .P.A.. (1947). Foundations of Economic Analysis(Enlarged Edition). United States: Harvard Economic Studies

Wetzstein, M.E. (2005). Microeconomic theory: Concepts & Connections. United Kingdom: Thomson South-Western.

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