Difference Between Positive and Normative Economics

Edited by Diffzy | Updated on: July 03, 2023

       

Difference Between Positive and Normative Economics

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Economics helps provide an understanding of the factors running and maintaining an economy. It is a vast subject. Although it may not be an exact science, it is a vital subject. Knowing about what keeps an economy blooming and what factors bring negative effects is necessary for making decisions concerning it. Economists need to use both objective and subjective information when making decisions about the economy. Objective information helps to make decisions wiser decisions. However, human beings make often make decisions using their values, opinions, beliefs, and judgements. Therefore, economists should also consider emotional factors. Hence, economics has two branches focusing on both information; positive economics and normative economics.

Positive economics helps objectively study the economy. It focuses on cause-and-effect relationships. Normative economics helps provide solutions to economic problems using value judgements. It helps increase the efficiency of an economy.  

The following article focuses on positive economics and normative economics. It also explains the difference between these different branches of economics.

Positive Economics vs Normative Economics

Positive economics is a subset of economics that seeks to study and understand the economy objectively. It seeks to answer the question "What is?" concerning economic phenomena. Positive economics analyses the cause-and-effect relationships in an economy. It uses data analyses, facts, and historical data. Therefore, all hypotheses in positive economics are empirically testable. This quality helps policymakers make informed decisions for their economy. Positive economics does not focus on value judgements or individual opinions, or any other factors that contain an emotional basis. This fact helps in making objective decisions. other names for positive economics are pure economics and descriptive economics.

Normative economics is a subset of economics that focuses on the values, opinions, and judgements of people. It seeks to answer the questions "What ought to be?" and "What should be?" in an economy. Normative economics uses subjective information to understand economic phenomena. It takes into account individual values and judgements. However, since normative economics studies theoretical situations, the hypotheses cannot provide empirical results. Normative economics helps economists by helping them make value judgements and creating solutions that can improve the economy. Another name for normative economics is policy economics.

Difference Between Positive Economics and Normative Economics in Tabular Form

Parameters of ComparisonPositive EconomicsNormative Economics
MeaningA branch of economics whose focus is on data and factsA branch of economics whose focus is on values, judgement, and opinions
Nature of economicsDescriptivePrescriptive
Answers the questionWhat is?What should be? What ought to be?
PurposeTo analyse cause and effect relationshipTo analyse and make value judgements
PerspectiveObjectiveSubjective
Focus onEconomic issuesProviding solutions to economic issues
Hypothesis testingThe statements or hypotheses in positive economics can be empirically testedStatements focus on theoretical situations and hence cannot be empirically tested
Other namesPure economics, descriptive economicsPolicy economics

What is Positive Economics?

Positive economics is a branch of economics that explains various economic phenomena. It focuses on developing and practising positive statements in the economy. Positive economics studies the cause-and-effect relationships in an economy. It helps to make better decisions concerning activities in the economy. Other names of positive economics are “pure economics” and “descriptive economics”.

Positive economics relies on facts of the economy. It answers the question “what is?” about economic events. It focuses on describing, quantifying, and explaining economic phenomena. The statements in positive economics are measurable, precise, and descriptive. You can measure the statements against historical evidence. In short, you can empirically test the statements in positive economics.

Positive economics uses scientific methods to understand economic phenomena and scarcity issues. It uses data analysis, associated figures, and relevant facts to study the economy. It is an objective method.

History of Positive Economics

The origin of positive economics dates back to the 19th century. Economists like John Neville Keynes and John Mill introduced the concepts of "what is" and "what should be" to economics.

John Keynes stressed the importance of logic and methodology in economics. He incorporated inductive and deductive reasoning into economics. Keyes published the book "The Scope and Methodology of Political Economy" in the year 1891, in which he categorized the approaches in economics as either inductive or deductive.

John Mill put forth the subject as a mix of economics and philosophy. He viewed economics from a data analysis perspective than from a value perspective.

In the twentieth century, Milton Friedman, one of the most influential economists of his time, adopted the views of Keynes and Mill. Friedman’s theories are “monetarism”. In 1953, he published a book “Essays in Positive Economics”. The book clarifies how positive economics only focuses on descriptive statements and not opinions and judgements.

Characteristics of Positive Economics

Factual Information

Positive economics uses only facts and empirical data. This characteristic makes positive economics testable. It gives people an opportunity to verify the information if they want to.

Valid Conclusions

Positive economics uses historical data and empirical evidence. Hence, the solutions formulated will be valid. In addition, if another person wants to investigate how the solution was developed, he can do so. He can follow the same steps involved in the formulation of the solution.

Absence of Subjectivity

Positive economics does not consider subjective information. People's opinions and values are not involved in positive economics. It only uses facts and objective statements. Every step in formulating a solution in positive economics, from gathering facts to establishing the results is objective.

Pros of Positive Economics

  • The data in positive economics are easily verifiable. Positive economics contains objective data and facts. In addition, there are historical data available for studying positive economics. Hence, positive economics helps to make a more informed and better decision.
  • Positive economics contains empirical data. Therefore, policymakers can test the information before making a decision. This benefit allows them to formulate better measures to deal with the current economic problems. Hence, positive economics helps to improve the conditions in an economy.
  • Positive economics does not focus on values, judgements, beliefs, or opinions. Sometimes people can make wrong decisions because they focus on these factors. Hence, making decisions using positive economics can help people make wiser decisions.

Cons of Positive Economics

  • It is not humanely possible to make all decisions by looking at only facts. Human beings tend to make decisions using both facts and emotions. Hence, keeping emotions out of positive economics is sometimes difficult.
  • Economics is not an exact science. It has many difficulties. Therefore, even though you have empirical data and historical data, you cannot make foolproof decisions. Not all solutions will be equally effective.
  • Positive economics cannot cater to the needs of all. Every individual is different. Economic conditions affect people differently. When policymakers make decisions, they often make a generalized decisions. Their solution will not help individuals in society in the same manner.

What is Normative Economics?

Another name for normative economics is “policy economics”. Normative economics is a branch of economics with a focus on the moral and ethical parts of real events. It helps generate and establish ideas. 

Normative economics uses beliefs, values, judgements and opinions to understand economics. These value-based judgements help in improving economic development and wealth distribution. The information for normative economics comes in different forms. It can be in the form of social media, government, journals, goals setting of companies, etc. An individual’s subjective opinion is in these posts.

Normative economics answers the questions "What should be?" and "What ought to be?" to determine the desirability of economic programs. Normative economics uses subjective analyses of economic phenomena. It works on theoretical situations than information. The hypothetical statements in normative economics have no right or wrong answers. You could prove certain statements but not all. Normative economics also takes into account individuals' opinions and preferences.

The statements in normative economics help to choose and make changes in economic policies. They also help influence economic decisions. Hence, normative economics helps us understand how to operate our economy more efficiently.

Examples of normative statements include statements depicting how to prevent tragedies, statements explaining how to raise people's wages, etc.

History of Normative Economics

Normative economics has its origin in Pigou’s economic welfare concept. The first form of normative economics was the “old-style welfare economics”.

In the 1930s, the second form of economics “New welfare economics,” emerged. New welfare economics used the Pareto principle and compensation principle to create normative hypotheses about policies. The hypotheses were also helpful in stating whether the policies were making a real improvement to the economic situation or not.

The more recent forms of normative economics consist of “social theory” and “public economics”. The social theory focuses on how individual choices lead to social preferences. It uses the method of voting to collect information on individual choices. Public economics focuses on the effects of the public sector on the economy.

Pros of Normative Economics

  • Normative economics uses value judgements. It is the moral and ethical part of economics. Hence, normative economics is useful for categorising different aspects of economics as good or bad.
  • Normative economics takes a holistic view when looking at economic factors. Hence, it is helpful to increase the usefulness of the available economic options.
  • Normative economics does not look at information from an objective view. Therefore, it has a less constricted view. It does not have to stick to facts and objective statements. Normative economics is more flexible.
  • Normative economics is the “what if” phase of economic policies. It has the freedom to create theoretical situations and conduct thought experiments on how the solution will pan out in the real world.

Cons of Normative Economics

  • Normative economics primarily focuses on opinions and judgements. Facts and objective information are not present in this approach. Hence, it is difficult to verify the correctness of the information in normative economics.
  • Normative economics creates ideological situations for hypotheses statements. These situations are not equal to real-world situations. A real-world situation will have many factors affecting the outcomes. Hence, it will have many outcomes. Normative economics cannot account for all these variations.
  • The statements in normative economics are theoretical. You cannot conduct tests on them to find empirical evidence.
  • In normative economics, decision-makers often will not have a thorough understanding of the topics under consideration. They may make decisions using assumptions about the situation.
  • Normative economics alone cannot create a stable market, which one can test and verify.

Main Differences Between Positive Economics and Normative Economics (in Points)

  • Positive economics is a branch of modern economics that focuses on data and facts. The branch of economics that focuses on values, opinions, and judgements is normative economics.
  • Positive economics has other names, pure economics and descriptive economics. Another name for normative economics is policy economics.
  • Positive economics is objective. It contains empirical data. Normative economics is subjective. It contains individuals' opinions and beliefs.
  • Positive economics is descriptive. In contrast, normative economics is prescriptive.
  • Positive economics seeks to answer the question “what is?” about economic phenomena. Normative economics answers the question “what should be” and “what ought to be”.
  • Since the statements in positive economics are objective, you can test them. Normative economics uses theoretical statements and hypotheses. Therefore, you cannot empirically test the information.
  • The primary role of positive economics is to study and understand the problems in the economy. Normative economics helps to provide solutions to these problems.
  • Positive economics focuses on analysing the cause-and-effect relationship in economic phenomena. This information can help policymakers make wiser decisions. In contrast, normative economics analyses value judgements. They help to operate the economy efficiently.

Conclusion

To sum up, positive and normative economics are concepts in modern economics. They help to manage the economy more efficiently. Positive economics uses objective information and facts to understand the economy and make decisions concerning the economy. Normative economics uses an individual's values, opinions, and judgements to understand and study the economy and make decisions. For an economy to function at an optimum level, it needs both objective information and the people's subjective values. Hence, it is best to use both positive and normative economics to deal with economic problems and create solutions.

References

  • https://www.britannica.com/biography/John-Neville-Keynes
  • https://corporatefinanceinstitute.com/resources/economics/normative-economics/
  • https://www.wallstreetmojo.com/positive-economics/

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"Difference Between Positive and Normative Economics." Diffzy.com, 2024. Tue. 16 Apr. 2024. <https://www.diffzy.com/article/difference-between-positive-and-normative-economics>.



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