Positive economics and normative economics are two standard branches of modern economics. The differences between them may seem simple, but it is not always easy to differentiate between the two. This article details the differences between the two specialized forms of economics.
Definitions - Positive and Normative Economics
Positive economics is a stream of economics that focuses on the description, quantification and explanation of economic developments, expectations and associated phenomena. It relies on objective data analysis, relevant facts and associated figures. Positive economics attempts to establish any cause-and-effect relationships or behavioral associations which can help ascertain and test the development of economics theories. For example, consider the following statement: "Though historical data indicates boost in spending if government cuts tax rates to half, the current budget constraints may not allow room for reducing tax rates." It attempts to convey a clear fact citing historical data that can be verified for the stated claim. Such statements can be defined, tested or rejected, and edited depending on the extent and availability of the evidence and form a part of positive economics.
On the contrary, normative economics focuses on the ideological, opinion-oriented, prescriptive, value judgments and "what should be" statements aimed towards economic development, investment projects and scenarios. It aims to summarize people's desirability (or the lack of it) to various economic developments, situations and programs by asking or quoting what should happen or what ought to be. For example, a statement like “Government should cut tax rates to increase disposable income and boost spending” may sound great, but it is far from being a fact, it lacks precise figures and concrete details about cause-and-effect, and it is confined to being desirable and subjective.
Key Differences between Positive and Normative Economics
- Positive economics is objective and fact based, while normative economics is subjective and value based.
- A positive statement can be verified against evidences or historical instances and can be approved or disapproved. A normative statement is usually based on an opinion and remains a value judgment that originates from personal perspectives, feelings, or opinions involved in the decision making process.
- Statements for positive economics connect cause and effects that can be tested for authenticity and applicability, while those for normative economics are generalized recommendations and may be difficult to test or prove with certainty.
- Positive economics statements are precise, descriptive and clearly measurable, owing to which the positive economics is often called the "what is" economics. On the other hand, normative economic statements are of rigid and prescriptive nature which often sound political or authoritarian owing to which the normative economic is also called "what should be" or "what ought to be" economics.
- Positive economic statements usually contain keywords like “are” and “is”, while normative economic statements typically contain keywords such as "should" and "ought."
- Positive economic statements attempt to convey a reality that may describe existential situation or past theory, while normative economic statements usually express desirability or value aimed at achieving certain economic goals or outcome of public policies.
Examples of Positive and Normative Economics
The statement - "Government-provided healthcare increases public expenditures" - is a short and precise positive economics statement. It is a factual statement and its validity can be proved (accepted or rejected) by examining the data related to healthcare spending in certain countries where the government provides healthcare.
However, the statement - "Government should provide basic healthcare to all citizens" - is normative. Though the statement makes a good point for a desired policy, it merely expresses a desire (what should be), and offers no way to prove whether government "should" provide healthcare. It is based on opinions about the role of government in individuals' lives and healthcare, the importance of healthcare, and who should pay for it.
Other examples of positive statements include: "Reducing the price of cigarettes has increased the smoking among consumers of all age groups," "The rise of crude oil prices reduces the use of cars and increases the use of bicycles" and "Brewer profits will drop if the government taxes alcohol."
Examples of normative statements include: "Women should be granted higher-value education loans compared to those provided to men," "Laborers should receive greater parts of capitalist profits," and "Working citizens should not pay for hospital care."
Importance of Positive and Normative Economics
Common observations indicate that discussions around public policies typically involve normative economic statements. A higher degree of disagreements persists in such discussions, because neither party can clearly prove their correctness (or the lack of it).
To make policies of a country, region, industrial sector, institution or business, both positive and normative statements are required. Though normative statements are generalized and subjective in nature, they act as the necessary channels for out-of-the-box thinking. Such opinions can form the foundation for any necessary changes that may have the potential to completely transform a particular project. However, normative economics cannot be the sole basis for decision-making on key economic fronts. The positive economics fill in for the objective angle that focuses on facts and cause-and-effects. Clubbed with positive economics, normative economics may be useful in establishing, generating and fulfilling new ideas and theories for different economic goals and perspectives.
A clear understanding of the difference between positive and normative economics should lead to better policy making if policies are made based on a balanced mix of facts (positive economics), and opinions (normative economics). Nonetheless, numerous policies on issues ranging from international trade to welfare are at least partially based on normative economics.