Positive vs. Normative Economics: A Comprehensive Guide

Introduction 

Economics is a social science that deals with the study of human behaviour while facing the economic problem of limited resources and unlimited wants. Positive economics and normative economics are two branches of economics that are about two different approaches used by economists to discuss economic phenomena. This article contains a comprehensive discussion of the differences between positive economics and normative economics.

Positive Economics

Positive Economics Definition

Positive economics is the branch of economics that deals with facts, figures, and the laws of economics. In simple words, positive economics focuses on objective analysis while describing economic activities. It means describing the economic activities as they are without making any value judgements.

Understanding Positive Economics

Positive economics is about describing how things actually are without making any value judgements. For example, if the government has introduced a new road tax to decrease traffic congestion, then positive economics will describe the actual effect of this road tax on motorists and traffic congestion. It may describe that:

• The government has introduced a road tax of $10 for all motorists passing a certain road.
• This road tax has reduced the number of motorists on that road by 20%.
• Traffic congestion is reduced on that particular road.
• The travel time for motorists is reduced.

All these points show a descriptive and objective approach to discussing what is actually happening as a result of introducing the new road tax. There are no opinions or value judgements made. This is the approach to describing economic phenomena used by positive economists.

Positive Statements

Positive Statements Definition

Positive economic statements refer to statements about economics that contain facts, figures, and the laws of economics. These statements are measurable and can be verified based on the available data or factual evidence. Positive statements can be true statements or false statements. These statements don’t contain any opinions or value judgements.

Positive Statements Examples

Some examples of positive statements are given below:

• Government benefits given to unemployed people reduce the incentive to work.
• Progressive taxes will reduce income inequality in a country.
• The inflation rate in the UK in October 2022 was 11%.
• The government has increased tax rates for large businesses.
• Smoking cigarettes negatively effects the health of smokers.

All the above statements are about facts, figures, laws of economics, or the cause-and-effect relationships between economic variables.

Normative Economics

Normative Economics Definition

Normative economics is the branch of economics that deals with opinions and value judgements about economic activities. In simple words, normative economics focuses on making value judgements while describing important economic issues. It means giving subjective opinions about how things should be or ought to be based on social, moral, and ethical principles.

Understanding Normative Economics

Normative economics is about making opinions and value judgements about economic policies or outcomes. For example, if the government has introduced a new road tax to decrease traffic congestion, then normative economics will form opinions about this tax based on ethical, moral, and social values. The above example of normative economics may describe that:

• The government is right to introduce a road tax of $10 on all motorists passing a certain road.
• This road tax is harmful for motorists.
• This road tax is beneficial for the government.
• The government should not impose the road tax.
• The government is wrong in imposing the road tax.

All these points show value judgements and opinions about the road tax. This is the approach to describing various economic phenomena used by normative economists.

Ethics in Normative Economics

Ethics are the moral guidelines about what is good and what is bad. Ethical principles act as a compassguiding opinions, value judgements and policy recommendations in normative analysis. When normative economists pass any value judgement about any economic activity or decision, the use ethical values and socially acceptable moral standards to give opinions. These opinions give direction to economics to achieve the value of economic fairness, equity, social justice and social welfare when economic policies are used.

Normative Statements

Normative Statements Definition

Normative economic statements refer to statements about economics that contain opinions or value judgements about how things should be or ought to be. These statements are not measurable and cannot be proven right or wrong.

Normative Statements Examples

Some examples of normative statements are given below:

• Government benefits given to unemployed people are wrong and unfair.
• Progressive taxes are not fair for the rich.
• The inflation rate in the UK should be less than 3%.
• Increasing tax rates for large businesses is unfair because they will create fewer jobs.
• Smoking is harmful, and the government should put a complete ban on smoking.

All the above statements contain opinions and value judgements about economic happenings.

Positive Economics vs. Normative Economics

The following table summarises the main difference between positive economics and normative economics.

Even though positive economics and normative economics are two different branches of economics, they are interconnected. In fact, they complement each other in terms of understanding economic policies and outcomes to a greater extent. Positive economics describes how economic concepts work and how they are applied in real life based on empirical evidence. Normative economics serve as a lens to assess the ethical side of these concepts when they are applied. Positive economics provides a fact-based foundation upon which the normative opinions are built. For example, positive analysis explains that a new tariff on imports will increase government revenue. Normative economics can then assess whether this tariff and its outcome align with ethical values and social welfare. Both of these branches of economics are different but complementary in nature. Using them together will give a full picture of economic decisions and outcomes.

Positive Statements vs. Normative Statements

While positive statement describe facts and figures, normative statements assess these positive statements by giving opinions based on moral grounds. Here is an example of a positive economic statement in comparison with a normative economic statement.

Applications of Positive and Normative Economics

Positive and normative economics have applications in almost all the areas of economics including taxation, subsidies, social welfare programs, labour laws, education policy, international trade, macroeconomic policies and many more. Positive economics describes the working of these economics policies and their outcomes while, normative economics assesses these economic policies based on moral principles. For example, an increase in the national minimum wage as a part of the new labour laws will increase unemployment (positive economics), but higher minimum wage will be unfair to those who will lose jobs (normative economics).

Is Positive Economics better than Normative Economics?

Nothing can be said about which of these branches of economics is better than the other. In fact, both of these branches have their own significance, and both are important. It is critical to integrate both of them while designing economic policies.

Limitations of Positive Economics

While positive economics is concerned with facts, figures, and the laws of economics based on objective data analysis, this branch of economics is based on some assumptions that serve as its limitations as well. The assumptions like ceteris paribus, marginal analysis, rational decision-making and data quality can make this branch of economics a simplified version of real-life human behaviours which are mostly very complex.

Limitations of Normative Economics

While normative economics is useful in assessing the morality of economic activities, yet, the ethical principles may vary in different parts of the world. There are disagreements possible in terms of moral standards and the concept of fairness. Such disagreements mean that the normative economics don’t give any universal set of value judgments about economic activities.

Conclusion

In conclusion, positive economics deals with facts, figures, and the laws of economics from objective angle, while normative economics deals with value judgements based on ethical standards and subjective angle. Both of these branches of economics are unique but interrelated. Both have their own limitations. Policymakers must use them together to fully understand various economic policies.