What is the normative economy?
Normative economics is an economic perspective that reflects normative or ideologically normative judgments about economic development, investment projects, statements and scenarios. Unlike the positive economy, which is based on an objective analysis of the data, the normative economy is very concerned with value judgments and statements of “what should be” rather than facts based on statements of cause to effect.
Normative economics expresses ideological judgments about what can lead to economic activity if public policy changes are made.
Positive and normative economy
The basics of normative economics
Normative economics aims to determine the desirability or lack of desire of people for various economic programs, situations and conditions by asking what should happen or what should to be. Normative statements therefore generally present an opinion-based analysis in terms of what is deemed desirable – for example, stating that we should aim for economic growth of x% or inflation of y% could be considered normative.
Behavioral economics has also been accused of being normative in the sense that cognitive psychology is used to guide (“push”) people to make desirable decisions by designing the architecture of their choice.
As the positive economy describes the economic programs, situations and conditions as they exist, the normative economy aims to prescribe solutions. Normative economic declarations are used to determine and recommend ways to change economic policies or to influence economic decisions.
Normative economic statements cannot be verified or tested.
Concrete examples of normative economic statements
An example of a normative economy would be: “We should cut taxes in half to increase levels of disposable income”. On the other hand, a positive or objective economic observation would be: “On the basis of past data, large tax cuts would help many people, but the budgetary constraints of the government make this option impracticable”. The example provided is a normative economic statement as it reflects value judgments. This particular judgment assumes that disposable income levels need to be increased.
Economic declarations of a normative nature cannot be tested or proven for factual values or for legitimate causes and effects. Examples of normative economic statements include “Women should benefit from higher school loans than men”, “Workers should receive a larger share of capitalist benefits” and “Working citizens should not pay for hospital care” . Normative economic declarations generally contain keywords such as “should” and “should”.
Key points to remember
- Normative economics aims to determine what should happen or what should be.
- While the positive economy describes economic programs, situations and conditions as they exist, the normative economy aims to prescribe solutions.
- Normative economics expresses ideological judgments about what can lead to economic activity if public policy changes are made.
- Behavioral economics tends to be a normative project.
The difference between the normative economy and the positive economy
Normative economics can be useful for establishing and generating new ideas from different perspectives, but it cannot be the only basis for making decisions on important economic issues, as it does not take an objective angle that focuses on the facts, causes and effects.
Economic statements from the positive economic angle can be broken down into determinable and observable facts that can be examined and tested. Because of this characteristic, economists and analysts often practice their professions from a positive economic perspective. The positive economy, being the measurable prospect, helps policy makers and other government and business authorities to decide important issues that affect particular policies under the guidance of factual conclusions.
However, policy makers, business owners and other organizational authorities also generally consider what is desirable and what is not for their respective constituents, making normative economics an important part of the equation when ‘they decide on important economic issues. Associated with a positive economy, the normative economy can branch out into many opinion-based solutions that reflect the way an individual or an entire community describes particular economic projects. These types of views are particularly important for policy makers or national leaders.