Positive, Normative, and … ?

by Donald Marron

Friday, August 28, 2009 at 12:07 AM EDT

Am I the only one who feels unfulfilled by the standard distinction between positive and normative economics?

I am gearing up to return to the classroom next week, to teach microeconomics to incoming masters students at the Georgetown Public Policy Institute. Anyone who’s experienced the first day of micro class knows what’s coming. After introducing myself and talking about the wonders of economics (which is, indeed, fun, useful, and enlightening), I will launch into the great positive vs. normative distinction.

In brief:

• Positive is the science side of economics: understanding and predicting the behavior of individuals, firms, markets, economies, etc. In short, the part of economics in which we try to be physicists (or, sometimes, biologists).

• Normative is the side of economics where we make value judgments, identifying policies as good or bad. In short, the part of economics in which we try to be philosopher-kings.

Both styles of economics are important, particularly in a public policy program. And drawing a careful distinction is vital, not least because of the many people in Washington (both economists and non-economists) who try to dress up their value judgments as science.

I have one problem with this distinction, however: it overlooks a great deal of what economists actually do.

Here’s one simple example: Congress is considering legislation that would create a cap-and-trade system for limiting emissions of greenhouse gases. Under that system, emitters would have to own enough carbon allowances to cover their emissions.

Congress is also considering using an auction to distribute some of these allowances. As a normative matter, I think that’s a great idea (but I wish they would auction even more).

Suppose that Congress decides that the auction should be designed in order to raise as much money as possible for the taxpayer. (Which I also think is a great idea – again a normative judgment.)

Question: When economists work to design this auction, are they doing positive economics, normative economics, or something different?

It seems clear to me that these economists are not doing positive economics. After all, they are designing a system, not observing how it works.

However, I don’t think they are doing normative economics either. As I’ve structured the question, the economists aren’t engaged in any value judgments. Congress has made the relevant normative decisions (e.g., deciding to use an auction to maximize revenue and deciding how many allowances to give away). The economists are just trying to figure out how to accomplish that goal.

In this case, I think the economists are acting as engineers, not scientists or philosopher-kings. And based on my years in government, I can tell you that there is a lot of economic engineering going on.

So, I am tempted to tell my students (in direct contradiction to the textbook) that there are actually three kinds of economics: positive, engineering, and normative.

Which leads me to two questions for my illustrious readers:

• Am I wrong here? Should I just shoe-horn my “engineering” idea into the normative category, as most textbooks do? (That’s a gain in simplicity and conformity, I suppose, and it reflects the reality that engineering can slip into normative; on the other hand, it loses the fact that some pieces of economic advice — e.g., how to maximize revenues — do not involve value judgments.)

• If you think I’m right, what should this third piece of economics be called? So far, I’ve considered words like “Design”, “Engineering”, and “Prescriptive”. The last one isn’t very good (since normative conclusions could also be prescriptive), but at least it ends in “-ive”.

Thanks.

P.S. A few years ago, Greg Mankiw had a nice article on the dual role of macroeconomists as engineers and scientists; it appeared in the Journal of Economic Perspectives (here’s an ungated version).