Economics: Normative or Positive?

This is part E of Lecture 1: Gratitude, Contentment, and Trust – Register for ongoing online course on A New Approach to Economics at?https://bit.ly/AZIEML . This part 1E continues the discussion of part?1D: Methodology , explaining how confusions about methodology have affected the discipline of Economics.

A major source of confusion is the widespread acceptance of Milton Friedman’s methodological stance. His enormously popular essay on “The Methodology of Positive Economics,” claims that economic theory is positive – it describes and does not prescribe. At the same time, Friedman asserts that significant economic theories have wildly inaccurate assumptions. It is possible to resolve the glaring contradiction between “wildly inaccurate assumptions” which must nonetheless be “descriptive, not prescriptive” only by invoking the logical positivist philosophy. Instead of going through this complex route, and explaining how the failure of logical positivism also implies the failure of Friedman’s methodology, we take a more simple and direct route to this same result: Economics claims to be positive and descriptive, but is actually normative and prescriptive.

This can be illustrated by the economic theory of behavior. The concept of “Rational” behavior is normative – it tells us about an ideal form of behavior and is prescriptive. This prescription – that rational behavior involves maximizing pleasure over our lifetime – arises from the rejection of Christianity, God, Judgment, and afterlife. It should be obvious that maximization of pleasure in this lifetime would not be rational for those who believe in an infinite afterlife. Our central point here is that economic theory of behavior is a normative theory that emerges out of the rejection of religion.

It is a separate question as to whether this normative theory describes actual behavior of human beings. Experiments to assess this have been carried out since the 1960s and overwhelming evidence has accumulated against the theory of utility maximization. For details see?The Strong Conflict Between Human Behavior and Economic?Theory . One of the most striking examples of this conflict is provided by the Dictator Game (a variant of the Ultimatum Game), described in greater detail below.

In the Dictator Game, one person is asked to share a pile of money with a second person. They can take as much as they like for themselves, and the second person gets what they leave in the pile. Rational behavior dictates that one should take everything, but actual behavior shows that 50-50 splits are most common (about 30%). The vast majority of people take between 50% and 80% and leave at least 20% for others. Only people with training in economics take everything, and even then, only a few of them. The results show that, contrary to assumptions of economists, people care about others, and also about the social disapproval that comes from being seen as greedy.

The conflicts between economic theory and actual behavior occur in a wide range of circumstances. These conflicts arise from the economists’ assumptions that humans are selfish, competitive, and unemotional, while reality suggests that humans are generous, cooperative, and emotions often trump reason and calculation. A prime example of this conflict is the Prisoner’s Dilemma, where people often cooperate, contrary to the utility maximization model. Economists have spent more than fifty years trying to explain this cooperation as a case of long-run selfish behavior. Evolutionary biologists (Wilson, de Waal, and others) have recently come up with a deep explanation for the failure of these efforts. They have shown that survival in harsh environments requires cooperation, and this behavior is built into human beings by evolutionary forces.

In conclusion, economic theories claim to be positive, but they are, in fact, normative. They do not describe human behavior; instead, they prescribe standards for “rational” behavior. Many papers show that those trained in economics learn to be selfish, proving that economic theory is normative. Furthermore, it teaches highly undesirable norms as depicted in?homo economicus, who is cold, callous, and calculating . Economic theory is therefore not only inaccurate but also harms society by encouraging anti-social behavior.