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Wednesday, March 23, 2005

Policy Analysis Market: Positive and Normative Perspectives (Catallaxis)

Daniel O'Connor at Catallaxis discusses the fate of the Policy Analysis Market (i.e. terrorism futures) in terms of both positive vs. normative economics. He first give us this background:

As Milton Friedman famously argued, positive economic analysis is designed to answer the question what is? with respect to economic development. It is concerned with understanding how the economic system has behaved in the past in order to predict how it will behave in the future. Normative economic analysis, in contrast, is designed to answer the question what ought to be? with respect to economic development. Therefore, it incorporates value judgments that are not necessarily grounded in the positive economic theories..

...Therefore, the debates over economic policy are often framed in terms of positive claims vs. normative claims that are difficult to reconcile, because one set of claims calls for empirical validation to ensure the policy works, while the other calls for ethical validation to ensure it is appropriate. Moreover, this framing is typically only implicit as the protagonists often have a difficult time differentiating the positive claims from the normative claims, thereby undermining their attempts at validation. Worse yet, many debates over the state’s economic policy are entirely based on competing normative claims that pit one ethical perspective against another ethical perspective, or one political philosophy against another political philosophy, with little or no recourse to positive theory and empirical evidence.
He then goes on to state some reasons why the PAM might not have been effective on positive grounds (including the possibility that participants might be state-monitored, the very high incentives of terrorists to send false signals, and the lack of a market in the underlying asset (the terrorist attack) on which the contracts are based).

He finishes by recapping how the real nails in this idea's coffin came from normative arguments: that it was "morally offensive".

My sense is that arguments in the public sphere today about economic issues are much more likely to come from a normative perspective. I would also guess that the likelihood of a positive argument increases the more educated (particularly in business, economics, or logic) or politicially conservative the arguer is.

Click here for the whole article.

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