The Nature of Economics: A Positive Science and an Engine of Analysis

This essay explicitly expresses my views and approach to economics. It solely articulates my personal opinion on what economics is as a field of study. I consider myself a neoclassical economist because I use the neoclassical approach systematically every time I am engaging in a work of economic analysis. However, this essay does not concentrate on the essence of neoclassical economics, but on the reasons why economics is, in my view, a positive science and an engine of analysis.

I – Economics as a Positive Science

The debate regarding the essence of economics has been unsettled. The debate on whether economics is a positive science or not remains vivid in the economics profession. Economists have always disagreed on that very topic, but we could all agree at least, that economics is not an exact science. Before illustrating the reasons why, I believe that economics is a positive science, it is imperative to settle one undeniable point: economics is a social science, first and foremost. It is a social science because it deals with human behavior. Any field of study that engages in the scientific study of human behavior and human interaction, is inherently a social science. Now the question we should ask ourselves is whether a social science can be a positive science.

A positive science is defined as the application of formal analysis to empirical science.[1] An empirical science is founded on two factors: (1) the testability of a hypothesis, and (2) the reproducibility of the results obtained from the test. Economics fits into these two factors because in addition to dealing with human behavior, it also deals with quantities. In economics, hypotheses are measurable and the results obtained from those measurements are reproducible. Economic indicators such as income, price, labor, capital, GDP, GNP, unemployment rate, wage, profit, marginal product of labor, marginal product of capital… and the list goes on; are all metrics that enable the measurement of economic phenomena. Measurements are ineluctably quantitative because it is impossible to measure objectively indicators with qualitative instruments. In his book The Theory of Political Economy, William Stanley Jevons asserted that economics is necessarily a mathematical science because it deals with quantities, and anything that deals with quantities is necessarily mathematical.

In 1953, Milton Friedman, the greatest economist of the twentieth century, wrote a very important paper entitled Methodology of Positive Economics, where he argued that economics is a positive science and the ultimate goal of a positive science is the development of a “theory” or, “hypothesis” that yields valid and meaningful predictions about phenomena not yet observed.[2] In economics, hypothesis can be tested, and phenomena can be predicted. The simple example of “supply” and “demand” illustrates the testability of the hypothesis and the predictability of the results from the test. It is a fact that a theory should be judged by its predictive power. Nonetheless, for the predictive power of a theory to actually be effective, it ought to be based on realistic assumptions because if the assumptions are not realistic, the predictive power of the theory will be contradicted by the empirical data.

In my view, economics is certainly a positive science because theories can be measured and be proved or disproved by the predictive power of the model. It is therefore a mathematical science but not an exact science like physics or chemistry.

II – Economics as an Engine of Analysis

In 1987, Amartya Sen, the 1998 Nobel Prize-winning economist, argued that economics sprang from two different origins, both related to politics, but in different way: (1) the first origin, which Sen calls the “ethical” approach, goes back at least to Aristotle. It related economics to human ends and social achievement.[3] Adam Smith is a pioneer of the first approach. (2) The second, which he [Sen] calls the “engineering” approach, is concerned primarily with logistical issues. It derives in part from technique-oriented analyses of statecraft, and in part from analyses of technical problems connected with the functioning of markets.[4] Leon Walras, Alfred Marshall, and William Stanley Jevons are known to be pioneers of this second approach.

I must say that I do side with the engineering approach to economics, and I have two reasons to support my arguments.

First, my engineering approach to economics is grounded on the fact that economics is a powerful tool to shape society. And the only way to shape society is through policy implementation. Policies are what take society into a particular direction. For example, if a government decides to impose a capital levy on businesses, the ultimate consequence of that policy would be that aggregate growth in the private sector would depreciate because those who own the means of production would not want to see their capital being taxed since it will depreciate the value of their asset. Changing such policy would inevitably lead to a different outcome. By measuring impact of policies, we can know with some degree of certainty how effective a policy could be. Hence, economics in this situation is a tool that helps us promote societal changes.

Second, my engineering approach to economics is based on the fact that economics can be used as a tool of analysis to understand and analyze people’s behavior. Economics is the science of decision-making. The engineering approach to economics helps measuring the outcome of their decision, therefore, the factors that led to that decision. The engineering approach to economics helps us understand the notion of exchange in a trade between two parties.

III – Conclusion

My approach to economics does not mean that the notion of subjectivity is irrelevant to the field at all. Instead, subjectivity plays an important role in economics. I do use the methodological individualism approach when I seek to explain individual and rational choice. Unlike Austrians who essentially and exclusively rely on the subjectivity of the individual to perform their analysis, I depart from the fact that the individual is rational and self-interested, and I therefore attempt to measure objectively the rational of his choice based on the outcome generated by his decision. Of course, I am aware that human beings are not always rational. I do take that into account, but I believe that it is easier to start from the axiom that human beings are rational and self-interested because it facilitates the modelling process of their behavior while maintaining and even incorporating a set of realistic assumptions that will accompany the rational and self-interested assumption, which I call the default assumption.

As I argued at the outset of this essay, economics cannot be an exact science because it principally deals with human behavior and human behavior fluctuates. Some may ask, if human behavior fluctuates constantly, then how can we predict with certainty how people are going to react? We can mathematically predict human behavior with a certain degree of confidence because individuals tend to repeat actions that benefit them. Someone who deploys a strategy to get a particular outcome that benefits him, will continue using that very same strategy until the outcome starts diverging from the strategy itself. Let us remember that human beings are not always rational about every single thing they do, but they are rational by default because our ability to think is what distinguishes us from animals. And our ability to think is not an artifact, it is a natural element of the human species. To conclude this essay, I do argue that economics is a mathematical science in which human behavior is predictable to a certain degree using analytical tools. It is a mathematical science where theories can be measured objectively to deliver tangible results that will influence our decision-making process.

[1] Wong, Stanley. “Positive Economics.” The New Palgrave: A Dictionary of Economics. (1987). Volume pp. 920-21 [2] Friedman, Milton. “The Methodology of Positive Economics.” Essays in Positive Economics. (1966). University of Chicago Press. Pp. 3-16, 30-43 [3] Barber, William J. A History of Economic Thought. (1977). Penguin. ISBN 0140136908 [4] Ibid.