What is Normative Economics?
Normative Economics is the opinions of economists who tell us what they think. It can be true for some and false for some. And these statements mentioned under normative economics aren’t verifiable. They can’t be tested either.
Normative economics is just the twin division of positive economicsPositive EconomicsPositive Economics is a branch of modern economics that describes, explains, & clarifies several current economic facts with an objective approach. It prohibits value judgement & only revolves around the “what is” scenario. read more; because without normative economics, positive economics just don’t make the cut. Here’s how.
How is Normative Economics Related to Positive Economics?
Let’s say that a country will decide on its financial policy. The authorities talk to the experts and asked them to send a report on the current economic scenario of the country. They follow suit. Then the authorities ask the experts/economists what the country should do in the current situation! The economists/experts take time and give their suggestions and recommendations. And the authorities agree to the suggestions offered by the economists and that’s how the policy is made.
In the above scenario, you would see that there are two parts. The first part is all about “what is”. And then the next part is all about “what can be”. The first part is based on positive economics because there’s no judgment or opinions in the first part. However, the second part comprises of suggestions-based statement that is purely based on the value and understanding of fellow economists and their judgments.
If one part is missing from the above scenario, it would be impossible to create policies. We need both, even for a business.
If a business sees that its products are getting sold more in the upper market, it would try to do push sales as much as they can in the upper market.
The first part of the business is purely informational, descriptive statement, meaning it is based on positive economics. The last part is completely value-based for which the business starts to sell its products in the upper market and it is actually based on normative economics.
Examples of normative economics statements
Let’s understand this with real-life examples.
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For eg:
Source: Normative Economics (wallstreetmojo.com)
Normative Economics Example#1
Positive Economics: The US Government should cut taxes for all countrymen.
If we stop here, it would be incomplete, because, on the basis of this, a concrete policy can’t be made. So, what do we need now? We need a statement under normative economics which will support the statement under positive economics.
Normative Economics: This move will increase the purchasing power of all citizens and they would be able to facilitate the economic growth of the country.
Normative Economics Example#2
Normative Economics: The economists of the UK mentioned that the UK would be a more capital intensiveCapital IntensiveCapital intensive refers to those industries or companies that require significant upfront capital investments in machinery, plant & equipment to produce goods or services in high volumes and maintain higher levels of profit margins and return on investments. Examples include oil & gas, automobiles, real estate, metals & mining.read more country if it would allow more foreign nationals to build their businesses.
But why the economists of the UK mentioned the above statement? There is another statement before the economists said so. And it is a statement which will fall under positive economics.
Let’s look at the statement under positive economics.
Positive Economics: It is reported that the percentage of foreign businesses in the UK is quite low then in the US.
As we mentioned in the positive economics, it has become clear why economists of the UK have told such a statement.
Why combinations of positive and normative economics help policymakers?
Positive economics talks about factual statements and analyses. These statements either happened or are subject to verification. And normative economics, on the other hand, talks about what would be the next steps! Since one is portraying the fact and another is articulating what one should do in a given situation, the combinations of both of these help the policymakers and planners.
If we present one single statement, it doesn’t make sense. If we know the fact, what would we do only with the fact? If we only present the judgment, on which we are making the judgment? Since positive economics help economists look directly into the statisticsThe StatisticsStatistics is the science behind identifying, collecting, organizing and summarizing, analyzing, interpreting, and finally, presenting such data, either qualitative or quantitative, which helps make better and effective decisions with relevance.read more, they can test whether this is true for all situations. If yes, they give their recommendations. If not, they change their approach and offer different suggestions. In both of these cases, normative economics is applied.
For example, workers’ wages are $5 per hour. This is a statement of positive economics. If we now say that the workers’ wages should be more than $10 per hour; it would be a statement under normative economics. If we club both of these statements, it makes sense why we are combining the fact and the judgment on the fact.
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This has been a guide to what is Normative Economics? We also discuss normative economics examples and how it is related to positive economics. You may also have read through these other articles on Economics –
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