How Economists Approach the World
Positive and normative economics, economic methodology, and a brief history of economic thought.
- Distinguish positive from normative economic statements and give examples of each
- Explain why the distinction matters — and where it can mislead
- Identify key economists and schools of thought from the 18th century to the present
- Describe the main ideas of each school and their relevance to IB Economics
Positive vs Normative Economics
Objective, testable statements about what is. Positive statements describe or predict — they can in principle be confirmed or refuted by evidence.
Example: "A fall in interest rates increases consumer spending."
Value judgements about what should be. Normative statements reflect opinions and cannot be settled by evidence alone.
Example: "Lowering interest rates is the best way to help small businesses succeed."
Can you tell the difference?
| Statement | Type |
|---|---|
| The unemployment rate in New Zealand is 5.2%. | Positive |
| Increasing education funding will boost long-term economic growth. | Positive |
| Reducing income inequality makes society fairer. | Normative |
| The average price of petrol rose by 5% last year. | Positive |
| Banning single-use plastics is the right way to protect the environment. | Normative |
| A cut in income tax will increase average household disposable income. | Positive |
| Banning petrol motorbikes will affect low-income households most. | Positive |
| Banning petrol motorbikes is unjust. | Normative |
Positive statements sometimes sound like they carry an opinion, but they don't. The judgement comes from you. For example, "Going on holiday is inefficient" is a positive statement. Your brain might add "…and that's bad" — but that addition is normative. Be alert to when you are adding a "good" or "bad" to something that is only describing what is.
Beware positive economic statements that appear to stand alone as complete arguments. If you rely on economics to support your argument, what will you do if the economics is disproven?
Economic Methodology
Notes on the use of hypotheses, models, the ceteris paribus assumption, empirical evidence, and refutation will be added here.
History of Economic Thought
Understanding where economic ideas came from helps explain why models look the way they do — and why economists disagree. Each school of thought emerged from a historical context and reflects a set of values as well as a set of analytical tools.
18th century — Adam Smith and laissez-faire
Smith argued that markets coordinate self-interest into social outcomes — the "invisible hand." He believed government should play a limited role: justice, public works, and defence. But Smith was not entirely laissez-faire:
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
For markets to work, competition and information are necessary. Competition policy matters to protect consumers.
19th century — Utility (pre-marginal)
Bentham and Mill saw utility as happiness. They worked within the classical tradition, debating cost-of-production theories of value versus subjective value — laying foundations for later consumer behaviour theory.
19th century — Marginal utility (Marshall)
Marginal utility determines value — not the total utility of a good, and not the cost of inputs used to make it. Alfred Marshall developed the core tools of supply and demand, equilibrium, consumer and producer surplus, and elasticity that IB Economics uses throughout.
19th century — Say's Law and classical macro
"Supply creates its own demand." In a flexible-price world: producing goods requires paying for factors of production (including labour); households, as owners of those factors, use that income to buy products — and the cycle repeats. This implies a self-correcting economy with limited need for government macroeconomic intervention.
19th century — Marx
Marx analysed business cycles and crisis in capitalism. His framework of historical materialism held that the economy drives law and politics, with the flow arising from class conflict. His labour theory of value held that profit represents surplus value extracted from labour.
20th century — Keynes and macroeconomics
In a deep downturn, demand can be deficient and unemployment involuntary — the economy does not automatically self-correct. Sticky wages and prices prevent the classical adjustment from working. Government should actively stabilise demand through fiscal policy. The multiplier means an initial injection of spending leads to a larger final increase in income.
Late 20th century — Monetarist and new classical views
Friedman argued that inflation is always and everywhere a monetary phenomenon, and that there is a natural rate of unemployment that policy cannot permanently reduce. Expectations matter — people learn to anticipate policy, so it cannot fool them indefinitely.
21st century — New directions
Economics has expanded in many directions:
- Data-driven empirical methods
- Behavioural economics — limits of rationality, biases, and nudge theory
- Information economics — asymmetric information and market failure
- Game theory and market design
- Inequality research and distributional focus
- Climate economics and the circular economy
- Randomised controlled trials (RCTs) in development economics
- Digital platforms, network effects, big data, and AI
- Post-2008 and pandemic policy rethinks, including MMT debates
Practice questions for this topic will be added here.