Normative Economics

Positive analysis has to do with descriptive, objective, fact-based observations; in essence, it asks, “what has happened?” Normative analysis, on the other hand, is subjective, and value-based; it asks, “what should happen?”

Different people use the “should” of normative analysis in slightly different ways, usually without taking care to precisely contextualize what they mean when they say that something “should” happen in a particular way. While public policy analysts and scientists, for example, usually seem to be mindful (or at least appropriately transparent) with their shoulds, economists seem to have some trouble in this area and may at times engage in overreaching normative analysis.

Economists ultimately are studying human behavior. When they make predictions about “what the market should do,” they really are predicting how people will act and react with respect to various signals. At a first level, there’s a simple feedback loop here. Unlike doctors stating the way in which a virus “should” mutate, for example, the real subjects of the economists’ normative statement can hear and react to the economists, and they often do. A second level recognizes that economists often have their own (implicit, unstated) preferences built into their normative assessments. A hydrologist doesn’t say that water and sediment ought to interact in a particular way because she personally wants them to. Conversely, it does not seem uncommon that an economist would say that the market ought to ignore a particular signal because she personally believes that the market is better off ignoring signals of that type.

The previous paragraph hints at the different uses of the normative “should.” One is predictive, based on collected past observations, data, and other indicia that lead an economist to render a conclusion about what “should happen in the future (based on what I have observed happen in prior similar circumstances).” The second is a value statement, based on personal preferences that lead an economist to render a conclusion about what “should happen in the future (based on how I prefer people and systems to act and behave).”

Failing to distinguish between these is problematic because the economist’s audience is a) unlikely to detect or make the distinction and 2) will assume the statement is of the first, scientific, predictive type and thus endow it with a certain level of authority to which it may not be entitled.

There also is a certain arrogance on the part of economists when they dress their personal value-based “should” statements like the more detached, scientific ones. This might be most apparent in the context of valuing human life, a topic that could itself fill numerous posts. Rather than phrasing the inquiry as determining the value of a human life, which many people find objectionable, economists refer to the value of a statistical life, apparently in an attempt to quell these lay fears by encouraging people to think about the question in a more detached, lifeless manner. Asking people how much they would pay not to be in a stadium of 100,000 people, knowing that a certain, small number (perhaps one) of those people would die, for example, is thin cover for the essential question of how much, in a monetary amount, we value a particular human life. I’m not saying we shouldn’t confront such questions– things like risk-risk analysis are important– but when economists tell us we should value our own lives or the lives of others at a specified dollar value, that we should be willing to subject ourselves or others to a particular increased risk of death, or even that we should or should not make a particular investment, their lay audience is right to bristle at them. They are right to bristle because the economist has made a value judgment for his audience, and the basis or framework for that value judgment is likely to exclude elements present in his audience’s value framework. Moreover, these sorts of presentations frequently seem to seek to justify and excuse business decisions to the detriment of broader, human interests. If economists are scientists of some variety, then the second sort of normative statements, the personal value-based ones, can quickly morph into pseudo science. See, e.g., here.

This all comes down to a matter of language. When economists say that the market should behave in a certain way, they really are saying something about the behavior of people. When they use such a statement to predict how they anticipate a group of people will act or react, the economists are acting in a beneficial way, and their audiences properly rely on them because they are speaking within their authority as experts on how people tend to behave in similar situations. When they use such a statement to tell people what to do with their own resources or lives because the approach fits the economists’ vision of how people and markets best function, the economists may be acting in an arrogant or deceitful way, and their audiences improperly rely on them because they are extending beyond their authority as experts. Cf. the difference between ontological and deontological approaches.

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