What Is Normative Economics?
Normative economics is a perspective on economics that reflects normative, or ideologically prescriptive judgments toward economic development, investment projects, statements, and scenarios.
Unlike positive economics, which relies on objective data analysis, normative economics heavily concerns itself with value judgments and statements of "what ought to be" rather than facts based on cause-and-effect statements. It expresses ideological judgments about what may result in economic activity if public policy changes are made. Normative economic statements can't be verified or tested.
- Normative economics aims to determine what should happen or what ought to be.
- While positive economics describe economic programs, situations, and conditions as they exist, normative economics aims to prescribe solutions.
- Normative economics expresses ideological judgments about what may result in economic activity if public policy changes are made.
- Behavioral economics tends to be a normative project.
- Normative economics cannot be verified or tested.
Positive And Normative Economics
Understanding Normative Economics
Normative economics aims to determine people's desirability or the lack thereof to various economic programs, situations, and conditions by asking what should happen or what ought to be. Therefore, normative statements typically present an opinion-based analysis in terms of what is thought to be desirable. For example, stating that the government should strive for economic growth of x% or inflation of y% could be seen as normative.
Behavioral economics has also been accused of being normative in the sense that cognitive psychology is used to steer ("nudge") people to make desirable decisions by engineering their choice architecture.
As positive economics describe economic programs, situations, and conditions as they exist, normative economics aims to prescribe solutions. Normative economic statements are used to determine and recommend ways to change economic policies or to influence economic decisions.
Normative Economics vs. Positive Economics
Normative economics may be useful in establishing and generating new ideas from different perspectives, but it cannot be the only basis for making decisions on important economic issues, as it does not take an objective angle that focuses on facts and causes and effects.
Economic statements coming from the positive economics angle can be broken down into determinable and observable facts that can be examined and tested. Because of this characteristic, economists and analysts often practice their professions under the positive economic angle. Positive economics, being the measurable perspective, helps policymakers and other government and business authorities decide on important matters that affect particular policies under the guidance of fact-based findings.
However, policymakers, business owners, and other organizational authorities also typically look at what is desirable and what is not for their respective constituents, making normative economics an important part of the equation when deciding on important economic matters. Paired with positive economics, normative economics can branch into many opinion-based solutions that mirror how an individual or one whole community portrays particular economic projects. These kinds of views are especially important for policymakers or national leaders.
Examples of Normative Economics
An example of normative economics would be, "We should cut taxes in half to increase disposable income levels." By contrast, a positive or objective economic observation would be, "Based on past data, big tax cuts would help many people, but government budget constraints make that option unfeasible." The provided example is a normative economic statement because it mirrors value judgments. This particular judgment assumes that disposable income levels must be increased.
Economic statements that are normative in nature cannot be tested or proved for factual values or legitimate cause and effect. Samples of normative economic statements include "Women should be provided higher school loans than men," "Laborers should receive greater parts of capitalist profits," and "Working citizens should not pay for hospital care." Normative economic statements typically contain keywords such as "should" and "ought."