1.2 How do Economists approach the world?

1. Economic methodology 

The role of positive economics 

• • • ▪  The use of logic 

    • ▪  The use of hypotheses, models, theories 

    • ▪  The ceteris paribus assumption 

    • ▪  Empirical evidence 

    • ▪  Refutation 

The role of normative economics 

• • • ▪  Value judgments in policy making 

    • ▪  The meaning of equity and equality 

    • Economic thought

Origin of economic ideas in a historical context 

18th century: Adam Smith and laissez faire 

19th century: classical microeconomics (utility); the concept of the margin; Classical macroeconomics (Say’s law); Marxist critique of classical economic thought 

 20th century: Keynesian revolution; rise of macroeconomic policy; monetarist/new classical counter revolution 

  21st century: increasing dialogue with other disciplines such as psychology and the growing role of behavioural economics; increasing awareness of the interdependencies that exist between the economy, society and environment and the need to appreciate the compelling reasons for moving toward a circular economy 

Positive V Normative Economics:

Positive economics

 is the study of economics that is provable. This means factual statements about the economy or statements of ‘what is’. For example, unemployment in the economy will tend to increase if corporate taxes are continually raised as firms become unprofitable so will not need to hire so many employees. Positive economics relies on reasoning, logic and empirical evidence. Hence, such statements can be verified or refuted by referring to facts, evidence or further investigation. 

Examples of Positive statements

A fall in average incomes will lead to higher unemployment in the economy. 

l Increasing the national minimum wage will raise costs for businesses. l A reduction in income tax rates will create incentives for people 

to find employment. 

l A tax on plastic carrier bags will reduce the volume of plastic waste. 

l Greater spending on healthcare services will help to increase average life expectancy. 

l Pollution control is effective through an efficient system of penalties and fines. 

normative economics, 

which considers opinions, beliefs and statements of ‘what should be’ (or what ought to be). Normative economic statements or claims are subjective, rather than objective (unbiased), expressing a value judgement about what is perceived to be desirable or undesirable about the economy. Normative economic statements cannot be verified or refuted by referring to facts, evidence or further investigation. 

Examples of normative statements include: 

l The government should impose higher income taxes on wealthier people. 

l The country must impose higher tariffs (import taxes) on foreign goods entering the country. 

l The government should spend more money on education and less on national defence. 

l Prosperous countries must donate more money to low-income countries. 

l Society ought to ensure housing is provided for everyone.