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
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
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
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
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,
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
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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