Economics: a positive science & a social science
The genesis of this blog post lies in my attempts to explain to my family members, most notably my brother, currently a professor in engineering at a research university, of the kinds of research I engage in. And often when I am done describing what is that I have just read or what is that I have been working on, I am met with a genuine and sincere question on the other end of the line, “So what?” To whom my response is nearly always identical – “So nothing, other than that this paper helps us understand why we observe X” (X being the phenomena the paper is focusing on). And if that is met with a stony, uncomfortable silence, as if my previous response were somehow inadequate, I continue by saying that, I am sorry to disappoint him in that the paper that I just finished reading does not have any direct policy recommendations for what policy makers should do or how businesses should be run. Indeed, the vast majority of economics, as I see it, understand it and see it as being practiced in academia, is bereft of direct recommendations for policy makers, firms or individuals of what they should or should not do; indeed, in that sense, modern economics is largely value – free, as I strongly believe that it ought to be. And while some economists may feel that they need to be defensive about this lack of prescriptive-ness or the lack of being directly tied to policy, I, for one, see it as a strength of the discipline and find it a key reason why I am drawn to it.
At this stage, I think it is relevant to point out the distinction between a positive science and a normative science since it is key to what follows in this post. A positive science simply looks at the world as is whereas a normative science, on the other hand, rather than simply rest content with “merely” describing the world, also talks about the world as it ought to be in the opinion of the author.
To distinguish between the two approaches, the positive and the normative, let’s take an example from the world of taxes: A positive statement regarding the marginal tax rate (i.e. the tax rate paid on the last dollar earned) by individuals in the top tax bracket (which kicks in at a mere $373,650 of income for an individual) might be something on the lines of: “If we were to increase the marginal tax rate from 35% (where it currently is) to 39.6% (what the Obama administration proposes it ought to be) then we would depress the incentives to earn by individuals. Individuals affected directly by the tax hike are expected to work 2 hours per week fewer than what they would otherwise have.” A normative statement, on the other hand, might be on the lines of: “We ought to increase the marginal tax rate on individuals in the top income tax bracket to 39.6% from the existing 35% because doing so will help the government fund the wars in Iraq and Afghanistan.” Or to take a different use of funds, “We ought to increase the marginal tax rate on individuals in the top income tax bracket to 39.6% from the existing 35% because doing so will help the government invest more in clean energy.” Notice the difference between the three statements – in the very first statement (which comments about the decrease in hours worked), there is no value judgment associated with whether the increase in tax rates is good or bad or whether high income individuals working fewer hours is beneficial or harmful; it is simply a prediction of what might happen based on economists’ state-of-the-art understanding of the elasticity of taxable income and individual responsiveness to incentives. One can quibble about the assumptions used in arriving at that number, question the rigor or methodology of the studies on which the key parameters are estimated, but then once one agrees on those, one has to also accept the fact that an increase in the tax rates will reduce the number of hours worked by the high income individuals by approximately 2 hours / week, without necessarily agreeing on whether that is “good” or “bad”, however we want to define “good” and “bad”.
Contrast the first statement with the two subsequent statements which talk about the potential uses of the increased tax revenue (assuming that there is an increase after all behavioral responses are factored in) – one may be violently opposed to the war in Iraq and Afghanistan (note the irony) or one may be philosophically opposed to the government intervening in energy markets and deciding which technologies to tax or which to subsidize. However, irrespective of one’s position on either of those issues, there is no way of resolving an agreement between two individuals holding differing views on say, the wars in Iraq and Afghanistan. The best we can hope to get out of a discussion between two such individuals (and that is if we are lucky and they can resist the urge to call each other names) – “We can agree to disagree on whether the wars in Iraq and Afghanistan are justifiable or not.”
In my conception, economics is a positive science, not a normative one. Economists should (and here I am introducing my judgments about what economics ought to be, rather than simply describing economics as it exists) not be in the business of saying what society should do; they should be in the business of simply laying out a set of actions and the pros and cons of each of those sets of actions, based on the most state-of-the-art understanding within the economics profession of those different actions. Kind of like a menu on a restaurant card – you offer a menu card to your clients which might have the following items: “Lobster Ravioli - $15.95; Thai Chicken Skewers - $ 10.95; Smoked Salmon Roulade - $12.95” and so on and so forth and let the diner make the decision of what she wants to order (or doesn’t want to order).
This brings me to another related but distinctly different facet about what the discipline is about – in particular, about what the subject matter of economics is and what is distinctive about economics, when compared to other social sciences such as sociology or anthropology (disciplines about which I know precious little, by the way!) In this regard, a popular misconception in the minds of many, especially those who have never been to graduate school in economics, is that economics is somehow related with “money” or “material goods”. Or it is related to what the average citizen hears being reported as “Economic news” on the nightly news hour on TV, or in the “Business section” of the (virtual) newspaper she reads. Well, it is true that economics does include all of the topics included in those sections, but then it includes much more. In fact, I would go so far as to say that economics includes essentially all interactions between an individual and the environment around her and all interactions between individuals. (After all, economics is a social science, as opposed to being a natural science.) But then this definition which I offered is so expansive, that it can be rightfully perceived as being bereft of any content. Indeed, economics cannot be defined in terms of the subject matters it looks at but – by the lenses, it uses to look at the world. Paraphrasing Gary S. Becker[1], winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1992 and currently a University Professor at The University of Chicago: Economists use the “economic approach” to analyze issues that range beyond those usually considered by economists. The economic approach, Becker refers to, does not assume that individuals are motivated solely by selfishness or gain. In that sense, the economic approach is a method of analysis, not an assumption about particular motivations. “Behavior is driven by a much richer set of values and preferences. The analysis assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic.”
Now saying that an individual chooses action A over and above action B, because action A makes her happier than action B is tautological and again void of content. However, the utility of the economic approach is evident when we think of the impact of what changing the relative costs and benefits of actions A and B might do for the likelihood of the individual to choose among the different actions available to her. So, if the government in its infinite wisdom, decides that it wants to subsidize action B (say, buying a Prius) over action A (say, buying a Hummer), then we should expect some individuals to switch from buying a Hummer to buying a Prius. But what is more – the incentives need not be material incentives for this above discussion to hold; they can be (and often are) non-monetary in nature. Continuing with the same example, it is certainly the case that in some communities across America, it would be terribly “un-cool” to be seen driving the Hummer, and if an individual moves to such a community, then the likelihood she buys a Hummer over a Prius, when she is buying a new car, goes down, not because she is responding to material incentives, but because she is responding to opinions of her that would be drawn by her neighbors if she were seen driving the Hummer. That, to me, is the core and essence of the economic approach; it is not constrained by the questions one looks at and does not impose any a priori assumptions of textbook, seamless rationality, or perfect foresight, but that it surmises that individuals respond to incentives and altering the set of those incentives, leads to predictable changes in behavior, a claim which can be subjected to verification using the widely accepted tools and techniques of statistical hypothesis testing.
This is where the two main themes I have tried to cover in this post come together. The economic approach of looking at whether individuals buy a Hummer over a Prius doesn’t tell us about whether government should encourage one over the other – doing so would be a normative statement, whereas my claim is that economics is (a positive statement) and should be (a normative statement) in the business of describing the world as it exists, and also describing how we would expect the choices made by individuals to change with a change in the environment in which such individuals make these decisions.
I close with a reference that goes back to the debate over health care reform. Without taking a position on my views about whether the bill that was signed by President Obama into law earlier in 2010 is going to harm or hurt the country, let me just reproduce a brief excerpt from what I thought, was the most sensible synthesis of the debate that I had seen during this entire period. It comes from David Brooks, among my favorite commentators of today and I quote [2]: “It’s easy to get lost in the weeds when talking about health care reform. But, like all great public issues, the health care debate is fundamentally a debate about values. It’s a debate about what kind of country we want America to be. … We can debate this or that provision, but where we come down will depend on that moral preference. Don’t get stupefied by technical details. This debate is about values.” Brilliant and well said; economists should be laying out the costs and benefits of the various options proposed by their political masters using the state-of-the-art tools and techniques. However beyond that, the choice over which bill to have (or not to have) is not a decision which can be taken by economists alone, but by the political procedures of a democracy. Economists have a role to play in that discussion as well, but we engage in that discussion, not as professional economists, but as ordinary citizens, who also have a voice and a vote and who don’t forfeit their rights to being citizens by becoming professional economists. Comments and thoughts are always appreciated.
Cites:
1) http://nobelprize.org/nobel_prizes/economics/laureates/1992/becker-lecture.pdf
2) http://www.nytimes.com/2009/11/24/opinion/24brooks.html?em
At this stage, I think it is relevant to point out the distinction between a positive science and a normative science since it is key to what follows in this post. A positive science simply looks at the world as is whereas a normative science, on the other hand, rather than simply rest content with “merely” describing the world, also talks about the world as it ought to be in the opinion of the author.
To distinguish between the two approaches, the positive and the normative, let’s take an example from the world of taxes: A positive statement regarding the marginal tax rate (i.e. the tax rate paid on the last dollar earned) by individuals in the top tax bracket (which kicks in at a mere $373,650 of income for an individual) might be something on the lines of: “If we were to increase the marginal tax rate from 35% (where it currently is) to 39.6% (what the Obama administration proposes it ought to be) then we would depress the incentives to earn by individuals. Individuals affected directly by the tax hike are expected to work 2 hours per week fewer than what they would otherwise have.” A normative statement, on the other hand, might be on the lines of: “We ought to increase the marginal tax rate on individuals in the top income tax bracket to 39.6% from the existing 35% because doing so will help the government fund the wars in Iraq and Afghanistan.” Or to take a different use of funds, “We ought to increase the marginal tax rate on individuals in the top income tax bracket to 39.6% from the existing 35% because doing so will help the government invest more in clean energy.” Notice the difference between the three statements – in the very first statement (which comments about the decrease in hours worked), there is no value judgment associated with whether the increase in tax rates is good or bad or whether high income individuals working fewer hours is beneficial or harmful; it is simply a prediction of what might happen based on economists’ state-of-the-art understanding of the elasticity of taxable income and individual responsiveness to incentives. One can quibble about the assumptions used in arriving at that number, question the rigor or methodology of the studies on which the key parameters are estimated, but then once one agrees on those, one has to also accept the fact that an increase in the tax rates will reduce the number of hours worked by the high income individuals by approximately 2 hours / week, without necessarily agreeing on whether that is “good” or “bad”, however we want to define “good” and “bad”.
Contrast the first statement with the two subsequent statements which talk about the potential uses of the increased tax revenue (assuming that there is an increase after all behavioral responses are factored in) – one may be violently opposed to the war in Iraq and Afghanistan (note the irony) or one may be philosophically opposed to the government intervening in energy markets and deciding which technologies to tax or which to subsidize. However, irrespective of one’s position on either of those issues, there is no way of resolving an agreement between two individuals holding differing views on say, the wars in Iraq and Afghanistan. The best we can hope to get out of a discussion between two such individuals (and that is if we are lucky and they can resist the urge to call each other names) – “We can agree to disagree on whether the wars in Iraq and Afghanistan are justifiable or not.”
In my conception, economics is a positive science, not a normative one. Economists should (and here I am introducing my judgments about what economics ought to be, rather than simply describing economics as it exists) not be in the business of saying what society should do; they should be in the business of simply laying out a set of actions and the pros and cons of each of those sets of actions, based on the most state-of-the-art understanding within the economics profession of those different actions. Kind of like a menu on a restaurant card – you offer a menu card to your clients which might have the following items: “Lobster Ravioli - $15.95; Thai Chicken Skewers - $ 10.95; Smoked Salmon Roulade - $12.95” and so on and so forth and let the diner make the decision of what she wants to order (or doesn’t want to order).
This brings me to another related but distinctly different facet about what the discipline is about – in particular, about what the subject matter of economics is and what is distinctive about economics, when compared to other social sciences such as sociology or anthropology (disciplines about which I know precious little, by the way!) In this regard, a popular misconception in the minds of many, especially those who have never been to graduate school in economics, is that economics is somehow related with “money” or “material goods”. Or it is related to what the average citizen hears being reported as “Economic news” on the nightly news hour on TV, or in the “Business section” of the (virtual) newspaper she reads. Well, it is true that economics does include all of the topics included in those sections, but then it includes much more. In fact, I would go so far as to say that economics includes essentially all interactions between an individual and the environment around her and all interactions between individuals. (After all, economics is a social science, as opposed to being a natural science.) But then this definition which I offered is so expansive, that it can be rightfully perceived as being bereft of any content. Indeed, economics cannot be defined in terms of the subject matters it looks at but – by the lenses, it uses to look at the world. Paraphrasing Gary S. Becker[1], winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1992 and currently a University Professor at The University of Chicago: Economists use the “economic approach” to analyze issues that range beyond those usually considered by economists. The economic approach, Becker refers to, does not assume that individuals are motivated solely by selfishness or gain. In that sense, the economic approach is a method of analysis, not an assumption about particular motivations. “Behavior is driven by a much richer set of values and preferences. The analysis assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic.”
Now saying that an individual chooses action A over and above action B, because action A makes her happier than action B is tautological and again void of content. However, the utility of the economic approach is evident when we think of the impact of what changing the relative costs and benefits of actions A and B might do for the likelihood of the individual to choose among the different actions available to her. So, if the government in its infinite wisdom, decides that it wants to subsidize action B (say, buying a Prius) over action A (say, buying a Hummer), then we should expect some individuals to switch from buying a Hummer to buying a Prius. But what is more – the incentives need not be material incentives for this above discussion to hold; they can be (and often are) non-monetary in nature. Continuing with the same example, it is certainly the case that in some communities across America, it would be terribly “un-cool” to be seen driving the Hummer, and if an individual moves to such a community, then the likelihood she buys a Hummer over a Prius, when she is buying a new car, goes down, not because she is responding to material incentives, but because she is responding to opinions of her that would be drawn by her neighbors if she were seen driving the Hummer. That, to me, is the core and essence of the economic approach; it is not constrained by the questions one looks at and does not impose any a priori assumptions of textbook, seamless rationality, or perfect foresight, but that it surmises that individuals respond to incentives and altering the set of those incentives, leads to predictable changes in behavior, a claim which can be subjected to verification using the widely accepted tools and techniques of statistical hypothesis testing.
This is where the two main themes I have tried to cover in this post come together. The economic approach of looking at whether individuals buy a Hummer over a Prius doesn’t tell us about whether government should encourage one over the other – doing so would be a normative statement, whereas my claim is that economics is (a positive statement) and should be (a normative statement) in the business of describing the world as it exists, and also describing how we would expect the choices made by individuals to change with a change in the environment in which such individuals make these decisions.
I close with a reference that goes back to the debate over health care reform. Without taking a position on my views about whether the bill that was signed by President Obama into law earlier in 2010 is going to harm or hurt the country, let me just reproduce a brief excerpt from what I thought, was the most sensible synthesis of the debate that I had seen during this entire period. It comes from David Brooks, among my favorite commentators of today and I quote [2]: “It’s easy to get lost in the weeds when talking about health care reform. But, like all great public issues, the health care debate is fundamentally a debate about values. It’s a debate about what kind of country we want America to be. … We can debate this or that provision, but where we come down will depend on that moral preference. Don’t get stupefied by technical details. This debate is about values.” Brilliant and well said; economists should be laying out the costs and benefits of the various options proposed by their political masters using the state-of-the-art tools and techniques. However beyond that, the choice over which bill to have (or not to have) is not a decision which can be taken by economists alone, but by the political procedures of a democracy. Economists have a role to play in that discussion as well, but we engage in that discussion, not as professional economists, but as ordinary citizens, who also have a voice and a vote and who don’t forfeit their rights to being citizens by becoming professional economists. Comments and thoughts are always appreciated.
Cites:
1) http://nobelprize.org/nobel_prizes/economics/laureates/1992/becker-lecture.pdf
2) http://www.nytimes.com/2009/11/24/opinion/24brooks.html?em
Labels: Economics, normative science, positive science, social science
posted by sutirthabagchi | 10:34 AM
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