Domen Zavrl: Exploring the Differences Between Positive and Normative Economics
Domen Zavrl is an expert in commodities trading, cryptography and institutional economics who holds PhDs in applied macroeconomics and system dynamics. This article will look at positive versus normative economics, identifying the key differences between them and exploring the benefits and drawbacks of each.
Economics is a field that exists on the intersection between objectivity and subjective interpretation. Take for example the policymaker trying to decide whether a new tax would be beneficial. While one economist may focus on the increased revenue the new tax would generate for the economy, another may place a greater emphasis on fairness and using taxes to reduce inequality in society. While the first economist’s theory can be tested, the other opinion is rooted in the concept of what is morally right, i.e. it is open to subjective interpretation rather than hinging solely on scientific objectivity.
In economics, as in many other disciplines, it is vital to distinguish between descriptions of what is the case and what it should be. In the 19th century, John Neville Keynes characterised positive and normative economics as ‘the science of what is’ versus ‘the science of what ought to be’.
Positive economics centres around objective, testable, data-based economic analysis. Normative economics, on the other hand, focuses on ethical fairness, relying on value-based assessments and recommendations to achieve the most desirable outcome.
Utilising models based on objective data, positive economics focuses on explaining economic phenomena as they are and providing specific economic statements that can be tested against evidence. The goal of positive economics is to understand the inner workings of the economy without observations being clouded by personal opinions or moral judgement. For example, the statement ‘government healthcare programmes increase public expenditure’ is a positive one, as analysts can examine economic data to determine whether public spending is higher in countries that offer state-sponsored healthcare.
Positive economics relies on raw data and observable facts, eschewing loaded terms like ‘ought to’ or ‘should’. Relying on positive economics helps policymakers to answer questions like ‘How would increasing the minimum wage impact employment rates?’ or ‘What will happen if we raise taxes on petrol and diesel?’ Popularised by the Nobel-prize-winning economist Milton Friedman, positive economics can be used to answer fiscal and other outcomes, helping governments to predict how their policies would impact the economy, rather than focusing on their societal impact.
With an emphasis on values-laden perceptions rather than analysing factual data and cause-and-effect relationships, normative economics is often regarded as the ‘what ought to be’ side of the world of economics. Subjective viewpoints are reflected by normative statements as they originate from individual values, political ideals and cultural beliefs. Frequent integration of words like ‘ought’, ‘should’, ‘better’ and ‘worse’ in normative economics places the onus on economists to make moral and ethical judgements. Nobel Prize winner Amartya Sen is credited with making major contributions to development economics, was one of the most notable proponents of normative economics.
The advantages of positive economics lie in the fact that it is based on objective data rather than value judgements or opinions. By arming policymakers with the facts, positive economics enables them to take appropriate measures to tackle conditions with the potential to move the economy in a certain direction. For example, based on jobs data, the Bank of England might lower interest rates to prevent the economy falling into a recession.
However, normative economics also has its place, facilitating the generation and exchange of ideas from different perspectives. Unlike positive economics, normative economics is explicitly value-driven, rooted as it is in moral and personal preferences, informing economic goals according to societal priorities and ideals.
Essentially, both positive and normative economics have a role to play in the analysis and discussion of contemporary economic matters. Good policy decisions typically require both positive analysis and normative reasoning to identify the most desirable outcome.
