up a newspaper or listen to a news show on television and you will
hear economists say things that seem to contradict each other. For
example, one economist will say passing a trade agreement with
another country is bad and will cause people in the United States to
lose their jobs, and another economist will say that opening up trade
is good and will cause the U.S. economy to grow.
economics so abstract that there is nothing that economists can agree
is impossible to explain all of economics in one article. But if you
understand a few basic concepts about economics, it will help you
understand why economists reach such varying conclusions on the same
topic. In this article I will discuss one of those concepts.
Robbins defined economic as “the science that studies human
behavior as a relationship between ends and scarce means which have
alternate uses.” In other words, there is a limited amount of
stuff that we humans have to allocate, and different things happen
when we start allocating it different ways. How should we allocate
first concept to understand is that there are two kinds of economics
economics. Positive economics try to determine facts. Normative
economics try to understand the way things ought to be.
a minimum wage is a good example.
all economists agree that raising the minimum wage increases
unemployment. This is a statement of fact, or positive economics.
Whether we ought to have a minimum wage is normative economics.
example, an economist who thinks we should be minimizing unemployment
will want to decrease or eliminate the minimum wage. An economist
who thinks people who work should at least make a wage that they
could live on would be in favor of the minimum wage.
you heard these two economists on television, they would both be
saying their policy is best for people in the lower economic strata.
Both policies do help someone poor, but the policies help different
poor people. If you are looking for a job, you will like the first
policy; if you are working for a very low wage, you will want the
first economist basis their desired outcome on positive economics —
raising the minimum wage will
increase unemployment. The second economist is arguing based on
normative economics — what ought to be. Economists are not
very clear whether they are discussing positive or normative
economics. This makes it very difficult for the general public to
really understand the issue and makes the economists seem
incompetent. Just know when there is an argument about economics, at
least one side is talking about normative economics.
more example that I mentioned in the first paragraph should help
explain the difference between positive and normative economics.
trade is often in the news. Should the United State open up its
borders for more free trade?
economics tells us that through something called comparative
advantage, free trade expands the economies of both
countries. The size of the pie increases, and both countries are
normative economics of free trade is not always so simple. For many
years, the steel industry in the United States was protected from
outside competition through the use of tariffs. The jobs in the
steel industry were good, high-paying jobs, and we as a country were
reluctant to relinquish those jobs to overseas employees even though
there would be some very positive impacts on the United States
economy. Prices of many products would decrease due to lower steel
we as a country want to eliminate good, high-paying jobs in exchange
for perhaps more jobs that do not pay as much? Decreasing prices
really does help those that are poor in the United States. How do we
balance all the competing interests with respect to free trade?
These are difficult decisions that fall under the umbrella of
now you can understand why economists have contradicting points of
final point I need to make on normative and positive economics is
that politicians routinely state normative economics as facts.
Ignore almost everything politicians say about the economy, because
by knowing about positive and normative economics you have just
surpassed their understanding.
Adam Smith is obviously not the actual name of the author of this column. The real author has
worked for two Fortune 500 companies, one privately held company, and a public accounting
firm. His undergraduate degree was in accounting, and he earned an MBA for his graduate
degree. He also has completed coursework for a PhD. in finance. He continues to be employed
by one of the Fortune 500 companies.
The author grew up in the Washington D.C. area but also lived for several years in Arizona. He
currently resides with his family on the East Coast.
The author has held various callings in The Church of Jesus Christ of Latter-day Saints.