Positive and Normative Economics | Differences: What springs to mind when we hear about the positive and normative schools of thought in economics? Do we think of the authors, thinkers, writers, and philosophers who introduced these ideas? Or do we focus on the practical methods used to decipher a nation’s economic trajectory? Either response is valid. However, there is a correct way to position these two concepts, and in this article, we will explore both and their roles in the broader world.
To an everyday person, is understood as the field that deals with producing, distributing, and consuming wealth. This person also views economics as the methods by which an individual or country manages money. Hence, when someone is labeled an economist, people often perceive them as frugal or tight-fisted.
Economics is best defined as the study of scarcity and its impact on resource allocation in the production, growth, and consumption of goods and services. This field addresses crucial matters affecting a nation’s or a country’s financial health.
The best definition, as provided by Adam Smith, comes from his influential 1776 book, making a significant mark in the field of economics, An Inquiry into the Nature and Causes of the Wealth of Nations, and it went this way: Economics is “an inquiry into the nature and causes of the wealth of nations.”
The second definition is provided by Lionel Robbins, who characterizes economics as: “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. Economics encompasses a wide range of ideas, notably including the positivist school and the normative school of thought.
This utilizes a stream of consciousness model to quantify, describe, and explain economic developments and expectations. By relying on objective data analysis, figures, and relevant facts, it seeks to establish cause-and-effect relationships that test the validity of various economic theories.
Normative economics
Normative economics emphasizes proactive, prescriptive, and “what should be” statements, targeting economic development, discussions, progress, scenarios, and investment projects. Its goal is to assess people’s preferences or aversions regarding different economic situations by questioning what ought to be.
Differences Between Positive & Normative Economics
Here are their specific distinctions:
- Positivist statements are clear, measurable, and precise in their descriptions: They measure these statements against tangible evidence or historical instances, avoiding approval or disapproval in positive economics by accommodating diverse viewpoint.
Normative economics contrasts with positive economics by being subjective and value-based, stemming from personal perspectives and viewpoints on decision-making. It asserts rigid prescriptions, sounding authoritative as it pursues ideals of “what should be” or “what ought to be.”
2. Positive economics maintains objectivity through its reliance on factual analysis and measurable data, which can be verified and accessed: In contrast, normative economics approaches issues subjectively, influenced by individuals’ personal feelings and values when forming decisions.
Normative economics hinges on subjective viewpoints, capturing individual thoughts and perceptions to generate ideas.
3. Positive economics adheres to a scientific approach, focusing on empirical evidence and calculations to analyze specific economic issues, whereas normative economics lacks scientific verifiability: The positive economist’s assertions are documented for drawing conclusions. These assertions undergo scrutiny by comparing them with past statements or other records to test and validate them. Positive economists’ statements are subject to verification and refutation through such comparisons.
Normative economics, in contrast, offers solutions based on personal motives, values, and judgment rather than scientific evidence. These solutions reflect individual perspectives and cannot be proven or disproven.
4. Positive economics takes a methodical approach by offering a scientific and analytical examination of issues, whereas normative economics proposes solutions grounded in personal values: Every economist aims to draw conclusions in their statements, each employing distinct methods to achieve this goal.
The positivist approach stands validated through direct comparison with past economist statements or records. Positive economists focus on assessing real-time national dynamics, enabling policymakers to gauge the potential efficacy of proposed actions in achieving objectives. Their utility determines acceptance or rejection.
Normative economists, unlike their positive counterparts, do not aim to verify their theories through empirical testing against past observations. Instead, their statements reflect the subjective perspectives of individuals, focusing on what ought to happen rather than what has been observed.
5. Positive economists aim to understand ‘what is‘, focusing on describing economic phenomena objectively. In contrast, normative economists aim to determine ‘what should be’, emphasizing prescriptions for how economic outcomes ought to be shaped.
Positive economists rely on a factual approach known as “what is.” They base their analysis on established facts that are genuine and proven to have worked either within a nation’s economy or globally.
Normative economists focus on future possibilities and ideals, emphasizing what ought to be rather than what has been. They shape their arguments around the individual’s internal viewpoint, preferring personal perspectives over aggregated historical data.
6. Positive economists aim to investigate causal relationships between variables, whereas normative economics aims to offer value judgments: Positive economics tackles the core issues of the economy, elucidating the cause-and-effect relationships between variables through factual observations and real-world economic phenomena. It leverages empirical data and current economic conditions to predict future trends and shifts in the economy.
However, the normative economy employs real-world actions to implement economic solutions, address problems, and derive value-driven conclusions.
7. The optimistic perspective offers concrete data that could realistically occur in the future, whereas the normative perspective provides assertions that might or might not come to fruition: Drawing from previously gathered facts, statistics, and data collected over the years, this approach forecasts future possibilities. This is why many economists align their decisions with the positivist school of thought.
In this context, the normative perspective falls short because it often lacks reliable data to substantiate its claims. It’s limited and not grounded in facts, relying instead on the values and beliefs of others. Consequently, it fails to foresee future possibilities and is not widely respected or adhered to.
In summary:
To sum up, we must decide which is superior: Positivist or Normative Economics? Each has its merits and serves different purposes, holding a valuable spot in the broader economic landscape. Both, however, have their shortcomings. While the positivist perspective is essential for formulating policies in countries, regions, and industries, the normative perspective validates individual viewpoints and helps shape global economic principles that benefit everyone, not just individual nations.