Positive vs. Normative Economics: An Overview

Positive economics and normative economics are two standard branches of modern economics. Positive economics describes and explains various economic phenomena, while normative economics focuses on the value of economic fairness or what the economy should be.

To put it simply, positive economics is called the "what is" branch of economics. Normative economics, on the other hand, is considered the branch of economics that tries to determine people's desirability to different economic programs and conditions by asking what "should" be or what "ought" to be.

Key Takeaways

  • Positive economics describes and explains various economic phenomena or the "what is" scenario.
  • Normative economics focuses on the value of economic fairness, or what the economy "should be" or "ought to be."
  • While positive economics is based on fact and cannot be approved or disapproved, normative economics is based on value judgments.
  • Most public policy is based on a combination of both positive and normative economics.

Positive And Normative Economics

Positive 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. It attempts to establish any cause-and-effect relationships or behavioral associations which can help ascertain and test the development of economics theories.

Positive economics is objective and fact-based where the statements are precise, descriptive, and clearly measurable. These statements can be measured against tangible evidence or historical instances. There are no instances of approval-disapproval in positive economics.

Here's an example of a positive economic statement: "Government-provided healthcare increases public expenditures." This statement is fact-based and has no value judgment attached to it. Its validity can be proven (or disproven) by studying healthcare spending where governments provide healthcare.

Normative Economics

Normative economics focuses on the ideological, opinion-oriented, prescriptive, value judgments, and "what should be" statements aimed toward economic development, investment projects, and scenarios. Its goal is to summarize people's desirability (or the lack thereof) to various economic developments, situations, and programs by asking or quoting what should happen or what ought to be.

Normative economics is subjective and value-based, originating from personal perspectives, feelings, or opinions involved in the decision-making process. Normative economics statements are rigid and prescriptive in nature. They often sound political or authoritarian, which is why this economic branch is also called "what should be" or "what ought to be" economics.

An example of a normative economic statement is: "The government should provide basic healthcare to all citizens." As you can deduce from this statement, it is value-based, rooted in personal perspective, and satisfies the requirement of what "should" be.

Both positive and normative economic statements are required in order to create the policies of a country, region, industrial sector, institution, or business.

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.

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. But normative economics cannot be the sole basis for decision-making on key economic fronts. Positive economics fill in for the objective angle that focuses on facts and cause-and-effect. Coupled 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 may 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.