What Is Positive Economics?
Positive economics uses objective analysis in the study of economics. Most economists look at what has happened and what is currently happening in a given economy to form their basis of predictions for the future. This process of investigation is positive economics. Conversely, a normative economic study will base future predictions on value judgments.
Positive And Normative Economics
Positive Economics Explained
The cornerstone of positive economic practice is to look at fact-based behavioral finance or economic relationships and the cause and effect interaction to develop economic theories. Behavioral economics follows a psychology-based premise that people will make rational financial choices based on the information they find around them.
Many will refer to this study as "what is" economics due to its use of fact-based determination of thought. Normative economics, then, is called the "what should have been" or "what ought to be" study.
- Conclusions drawn from positive economics analyses can be tested and supported by data.
- Statements based on normative economics include value judgments.
- Positive economics and normative economics can work hand in hand when developing policy.
Testing Positive Economic Theories
Conclusions drawn from positive economics analyses can be verified and supported by data. For example, predicting that more people will save if interest rates rise would be based on positive economics because past behaviors can support it. The analysis is objective in nature, as opposed to normative statements and theories, which are subjective. Most of the information provided by the news media is a combination of positive and normative economic statements or assumptions.
Positive economic theory does not provide advice or instruction. For example, it can describe how government can impact inflation by printing more money, and it can support that statement with facts and analysis of behavioral relationships between inflation and growth in the money supply. However, it does not tell you how to properly enact and follow specific policies regarding inflation and money printing.
When considered together, positive economics and normative economics provide a clear understanding of public policies. These two theories cover both the actual and real facts and statements combined with an opinion-based analysis. Therefore, when making policy decisions it is best to understand the positive economic background of behavioral finance and the causes of events as you include normative value judgments on why things happen as they do.
Real World Example of Positive Economics
Fight for 15 is a nationwide movement to push for a $15 minimum wage on what would be considered normative economics. A stance on a $15 minimum wage is a value judgment. Those in the Fight for 15 campaign argue that a $15 minimum wage would be good while opponents argue that it would be harmful.
Historically, there has been much research about the impact of minimum wage increases, but there are no definitive findings that offer broad, sweeping conclusions about whether higher minimum wages are good or bad. However, there are specific details from specific studies that could be considered examples of positive economics.
The Seattle Ordinance
In 2015, Seattle passed a local ordinance to increase the minimum wage for workers in the city gradually. All workers will be earning at least $15 per hour by 2021 or sooner, depending on specific employment details. Since that time, there have been two major studies on the impact of the law.
The California Study
A study by researchers from the University of California-Berkeley focused specifically on restaurant employees, while another study by researchers from the University of Washington examined unemployment numbers.
The California researchers found that for every 10% increase in Seattle's minimum wage, employees of fast food restaurants saw a 2.3% boost in their earnings. This specific data is an example of positive economics, but the researchers' conclusion that the higher minimum wage was a success is not positive economics because the focus of the study was not broad enough or exhaustive enough to make such a finding.
The Washington Study
The Washington researchers concluded that the increase in the minimum wage was not successful, but that conclusion also is not an example of positive economics. However, some of the specific data they collected would be an example of positive economics. For example, they discovered that when the minimum wage increased, the number of low-wage workers decreased by 1% and hours for those still employed decreased slightly as well. While that specific data represents positive economics, the researchers' conclusion still can be questioned because other factors not addressed in the study—such as a potential increase in higher-paying jobs—may have impacted the data.