Often economists are asked to explain the causes of economic events. Why, for example, is unemployment higher for teenagers than for older workers? Some- times economists are asked to recommend policies to improve economic out- comes. What, for instance, should the government do to improve the economic
microeconomics
the study of how households and firms make decisions and how they interact in markets
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment and economic growth
well-being of teenagers? Can economics shed any light on the problem of non- medicinal drug use? How might economics help in finding solutions to the pro- blems associated with global warming? When economists are trying to explain the world, they are scientists. When they are trying to help improve it, they are policy advisors.
Positive versus Normative Analysis
To help clarify the two roles that economists play, we begin by examining the use of language. Because scientists and policy advisors have different goals, they use language in different ways.
For example, suppose that two people are discussing minimum wage laws.
Here are two statements you might hear:
PASCALE: Minimum wage laws cause unemployment.
SOPHIE: The government should raise the minimum wage.
Ignoring for now whether you agree with these statements, notice that Pascale and Sophie differ in what they are trying to do. Pascale is speaking like a scien- tist: she is making a claim about how the world works. Sophie is speaking like a policy advisor: she is making a claim about how she would like to change the world.
In general, statements about the world are of two types. One type, such as Pascale’s, is positive. Positive statements are descriptive. They make a claim about how the world is. A second type of statement, such as Sophie’s, is norma- tive. Normative statements are prescriptive. They make a claim about how the world ought to be.
A key difference between positive and normative statements is how we judge their validity. We can, in principle, confirm or refute positive statements by examining evidence. An economist might evaluate Pascale’s statement by analys- ing data on changes in minimum wages and changes in unemployment over time. By contrast, evaluating normative statements involves values as well as facts. Sophie’s statement cannot be judged using data alone. Deciding what is good or bad policy is not merely a matter of science; it also involves our views on ethics, religion and political philosophy.
Of course, positive and normative statements may be related. Our positive views about how the world works affect our normative views about what poli- cies are desirable. Pascale’s claim that the minimum wage causes unemployment, if true, might lead us to reject Sophie’s conclusion that the government should raise the minimum wage. Yet our normative conclusions cannot come from posi- tive analysis alone; they involve value judgements as well.
As you study economics, keep in mind the distinction between positive and normative statements. Much of economics just tries to explain how the economy works. Yet often the goal of economics is to improve how the economy works.
When you hear economists making normative statements, you know they have crossed the line from scientist to policy advisor.
Economists in Governmental and Supra-governmental Institutions
An old joke about economists concerns the politician who one day said that she would only employ economists with one hand: she was tired of receiving advice of the form, ‘On the one hand,…On the other hand….’
normative statements
claims that attempt to prescribe how the world should be
positive statements
claims that attempt to describe the world as it is
Throughout Europe, North America and the world more generally, many gov- ernment ministries dealing with economic issues – such as a country’s finance ministry or Treasury – have large numbers of economists working for them, pro- viding advice on alternative policy measures or forecasts of the economy. In the UK, the Government Economic Service is the biggest single employer of econo- mists, with about 1 000 of them working in 30 government departments and agencies.
The joke about one-handed economists does reflect an element of truth con- cerning the nature of economic advice – namely that good economic advice is not always straightforward. This tendency is rooted in one of the Ten Principles of Economics in Chapter 1: people face trade-offs. Economists are aware that trade-offs are involved in most policy decisions. For example, a policy might, on the one hand, increase efficiency but, on the other hand, reduce equity. It might help future generations but hurt current generations. An economist who says that all policy decisions are easy is an economist not to be trusted.
Economists are also found outside the administrative branch of government.
The Bank of England, the institution that implements the UK’s monetary policy, employs a large staff of economists to analyse economic developments in the United Kingdom and throughout the world. At the time of writing this chapter, both the Governor and Deputy Governor of the Bank of England were former professors of the London School of Economics, while the President of the German central bank, the Bundesbank, and of the US central bank, the Federal Reserve, were also former professors of economics. Most of the central banks of other European countries also have economic research departments, as do the Euro- pean Central Bank in Frankfurt and the US Federal Reserve in Washington.
Economists are also employed to provide advice at the supra-governmental level. The International Monetary Fund, which was created in 1945 to help pro- mote the health of the world economy, employs at its headquarters in Washington DC probably the largest number of economics Ph.D.s based at a single location anywhere in the world, originating from a very large proportion of the 185 coun- tries that make up the IMF’s near-global membership. Table 2.1 lists the websites of some of these agencies.
The influence of economists on policy goes beyond their role as advisors: their research and writings often affect policy indirectly. The great British economist John Maynard Keynes offered this observation:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from intellectual influences, are usu- ally the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.
Although these words were written in 1935, they remain true today. Indeed, the ‘academic scribbler of a few years back’ now influencing public policy is often Keynes himself.
Quick Quiz Give an example of a positive statement and an example of a normative statement. • Name four government departments that regularly rely on advice from economists.
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C A S E S T U D Y
Professor Mankiw Goes to Washington
Both of the authors of the textbook you are now reading are university professors. But in the past few years, each of us has had the opportunity to leave the ivory tower and put our economics to the test. One of us, Professor Taylor, went into the world of global finance, while the other, Professor Mankiw, had the opportunity to become the chairman of the US Council of Economic Advisors (CEA) and the US President’s chief economist from 2003 to 2005. Here, Professor Mankiw describes what it was like to be the chief economic advisor in one of the world’s most powerful economies.
As chair of the CEA, I met with the President about twice a week. Some of these meetings were briefings on the state of the economy; most were discus- sions of current issues in economic policy. I worked closely with other mem- bers of the White House staff to analyse policy options and brief the President on a wide range of topics, such as tax policy, the federal budget, social secu- rity and international trade. I also met regularly with economic officials out- side the White House, such as the Secretary of the Treasury (the head of the US finance ministry) and the Federal Reserve Chairman (the head of the US central bank) and with leaders of the business community.
For anyone used to the measured pace and quiet reflection of university life, taking such a job is exhilarating. Sitting with the President in his famous Oval Office in the White House, flying on Air Force One, and spending the weekend with the President and his aides at his country retreat, Camp David, are unforgettable experiences. Testifying as the President’s representa- tive before congressional committees, which include politicians who are usu- ally partisan and sometimes hostile, is also an experience a person does not easily forget – no matter how hard one might try.
During my two years in Washington, I learned a lot about the process by which economic policy is made. It differs in many ways from the idealised policy process assumed in economics textbooks.
Throughout this text, whenever we discuss economic policy, we often focus on one question: What is the best policy for the government to pursue?
We act as if policy were set by a benevolent king. Once the king figures out the right policy, he has no trouble putting his ideas into action.
In the real world, figuring out the right policy is only part of a leader’s job, sometimes the easiest part. After the President hears from his economic advisers about what policy is best from their perspective, he turns to other
TABLE 2.1
Websites
Here are the websites for a few of the government and supra-governmental agen- cies that are responsible for collecting economic data and making or advising on economic policy.
European Central Bank http://www.ecb.int
Organization for Economic Cooperation and Development
http://www.oecd.org International Monetary Fund http://www.imf.org
Bank of England http://www.bankofengland.co.uk
UK Treasury http://www.hm-treasury.gov.uk
UK Office for National Statistics http://www.ons.gov.uk US Federal Reserve Board http://www.federalreserve.gov
Professor Mankiw
advisors for related input. His communications advisors will tell him how best to explain the proposed policy to the public, and they will try to antici- pate any misunderstandings that might arise to make the challenge more dif- ficult. His press advisors will tell him how the news media will report on his proposal and what opinions will likely be expressed on the nation’s editorial pages. His legislative affairs advisors will tell him how Congress will view the proposal, what amendments members of Congress will suggest, and the likelihood that Congress will pass some version of the President’s proposal into law. His political advisors will tell him which groups will organize to support or oppose the proposed policy, how this proposal will affect his standing among different groups in the electorate, and whether it will affect support for any of the President’s other policy initiatives. After hearing and weighing all this advice, the President then decides how to proceed.
My two years in Washington were a vivid reminder of an important lesson:
making economic policy in a representative democracy is a messy affair – and there are often good reasons presidents (and other politicians) do not advance the policies that economists advocate. Economists offer crucial input into the policy process, but their advice is only one ingredient of a complex recipe.