Positive vs Normative Economics
Positive economics deals questions of facts which can be answered with empirical analysis without taking sides. On the other hand, normative economics addresses questions of fairness and ethics which are subjective.
Positive economics concerns itself only with uncovering the relationship between different economic phenomena i.e. interest rates, inflation rates, unemployment rate, GDP per capita, etc. and providing conclusions based only on objective analysis without offering any recommendation. Normative economics, on the other hand, offers value judgements and makes recommendations on what policies should be adopted for ‘the greatest good of the largest number of people’.
Both positive and normative economics may be based on empirical analysis, but positive economics stops short of prescribing any course of action while the normative economics attempts to provide recommendations to redress the situation. Conclusions of positive economics can be tested and verified because they are fact-based while the recommendations offered by normative economics can’t be tested because they have a mix of opinion.
Examples
Positive Economics
Following are the issues/statements which positive economists may be interested in exploring:
- There is an inverse relationship between wealth and demand for inferior goods.
- Adopting protectionist policies results in shrinkage of the total global gross domestic product.
- An increase in tax rate ultimately decreases total tax revenue.
- Strict enforcement of property rights results in increase in GDP.
- Monopolies are inefficient.
- The required rate of return on gambling stocks in higher.
- Developing countries tend to have higher GDP during autocratic regimes.
Normative Economics
Following are some statements which can be attributed to normative economics:
- Wealth tax should be implemented to reduce the disproportionate distribution of wealth.
- No person should be entitled to any inheritance because inheritances belong to the society.
- Tariffs should be increased on imports from countries with poor human rights record.
- Investors should adopt socially responsible investment approach i.e. do not invest in vice stocks i.e. tobacco, gambling, etc.
- Antitrust legislation does more harm than good.
- Developing countries should adopt democracy as a system only when they population is educated and emancipated.
You might ask what use the positive economics is if it can’t offer a course of action. The fact is that positive economics offers a diagnosis but leaves the prescription to government and other policy-makers.
by Obaidullah Jan, ACA, CFA and last modified on