Normative economics is a perspective on economics that reflects normative or ideologically prescriptive judgments about economic development, investment projects, statements, and scenarios. Although people often disagree on positive statements, these disagreements can ultimately be resolved through an investigation. However, there is another category of claims for which an investigation can never resolve disputes. A normative statement is a statement that makes a value judgment. Such a judgment is the opinion of the speaker; No one can “prove” that the statement is correct or not. Here are some examples of normative statements in economics: Economists engage in two different but related activities. You research economic issues, for example to determine cause and effect. Why, for example, did unemployment rise rapidly in 2008 and 2009? Economists also make policy recommendations. For example, what should the federal government do in response to rising unemployment? The first type of activity is economics, based on theories and evidence, where researchers try to determine how the world (or at least the economy) works. This is called positive thinking, and conclusions are called positive statements. A relevant conclusion could be that, since the level of employment is based on output in the economy (i.e.dem GDP), the increase in unemployment is due to the slowdown in GDP over this period. This slowdown has been called the Great Recession. These statements are based on the values of the person making them and cannot be proven false.
Normative economics aims to determine the desirability or absence of people for various programs, situations, and economic conditions by asking what should happen or what should be. Therefore, normative statements generally represent an opinion-based analysis of what is considered desirable. For example, the assertion that the government should aim for economic growth of x% or inflation of y per cent could be considered prescriptive. The second type of activity is more subjective and inevitably based on the researcher`s values. This is called normative thinking, and conclusions are called normative statements. A policy recommendation might be that, since the unemployed do not earn income, the government should try to stimulate demand in the economy so that the unemployed can return to work. Another policy recommendation could be that stimulating demand could include a larger federal budget deficit that future generations would have to pay back with higher taxes, so the government should not try to stimulate demand. Which of these recommendations is the right one? It depends on your subjective values. Unlike positive economics, which relies on objective analysis of data, normative economics is heavily interested in value judgments and statements about “what should be,” rather than facts based on statements of cause and effect. It expresses ideological judgments about what can lead to economic activity when public policy changes are made.
Prescriptive economic statements cannot be verified or verified. Positive statements (and positive thinking in general) are objective. As such, they can be tested. These can be divided into two categories. One is an assumption such as “unemployment is caused by a decline in GDP.” This can be verified empirically by analysing unemployment and GDP data. The other category is a statement of fact such as “It`s raining” or “Microsoft is the world`s largest computer operating system manufacturer.” Like assumptions, such claims can be shown to be right or wrong. A statement of fact or hypothesis is a positive statement. Also note that positive statements may be false, but as long as they are verifiable, they are positive. Economic statements from a positive economic perspective 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 profession under the positive economic aspect.
The positive economy, the measurable perspective, helps policymakers and other government and economic agencies decide on important issues that affect specific policies under the direction of evidence-based outcomes. Just as the positive economy describes economic programs, situations, and conditions as they exist, normative economics aims to prescribe solutions. Prescriptive economic statements are used to identify and recommend ways to change economic policy or influence economic decisions. Because people have different values, normative statements often cause disagreement. An economist whose values lead him to conclude that we should help the poor more will disagree with an economist whose values lead to a conclusion we should not make. Since there is no test for these values, these two economists will continue to disagree unless one convinces the other to adopt a different set of values. Many of the disagreements among economists are based on such differences in values and are therefore unlikely to be resolved. However, policymakers, entrepreneurs, and other organizational authorities also tend to consider what is desirable and what is not desirable for their respective constituents, making normative economics an important part of the equation for deciding important economic issues. Coupled with a positive economy, normative economics can branch into many opinion-based solutions that reflect how an individual or an entire community represents certain economic projects. These types of views are particularly important for national policy makers or leaders. Economic statements that are prescriptive in nature cannot be examined or proven for factual values or legitimate cause and effect. Examples of normative economic statements include “women should receive higher school loans than men,” “workers should receive a larger share of capitalist profits,” and “workers should not pay for hospital care.” Prescriptive economic statements typically contain keywords such as “should” and “should.” It is not uncommon for people to present an argument as positive to make it more convincing to an audience, when in fact it has normative elements.
Opinion pieces in newspapers or other media are good examples. Therefore, it is important to be able to distinguish between positive and normative demands. Behavioral economics has also been accused of being normative in the sense that cognitive psychology is used to get people to make desirable decisions by building their electoral architecture. Watch this short video to explore the differences between positive and normative analysis. An example of normative economics would be: “We should cut taxes in half to increase disposable income.” In contrast, a positive or objective economic observation would be: “Based on past data, significant tax cuts would help many people, but government budget constraints make this option impossible.” The example given is a normative economic statement because it reflects value judgments. This particular judgment assumes that disposable income must be increased. Normative economics can be useful for establishing and generating new ideas from different perspectives, but it cannot be the only basis for decisions on important economic issues, as it does not adopt an objective point of view that focuses on facts, causes and effects. The transcript of “Episode 5: Positive vs.
Normative” can be found here (opens in a new window).