I-4. Positive and Normative Economics

In studying economics it is important to distinguish two branches of the subject. The first is known as ‘positive economics’, the second as ‘normative economics’.

Positive economicsdeals with objective or scientific explanations of the working of the economy.

The aim of positive economics is to explain how society makes decisions about consumption, production, and exchange of goods. The purpose of this investigation is twofold: to satisfy our curiosity about why the economy works as it does, and to have some basis for predicting how the economy will respond to changes in circumstances. Normative economics is very different.

Normative economicsoffers prescriptions or recommendations based on personal value judgments.

In positive economics, we hope to act as detached scientists. Whatever our political persuasion, whatever our view about what we would like to happen or what we would regard as ‘a good thing’, in the first instance we have to be concerned with how the world actually works. At this stage, there is no scope for personal value judgments. We are concerned with propositions of the form: if this is changed then that will happen. In this regard, positive economics is similar to the natural sciences such as physics, geology, or astronomy.

Here are some examples of positive economics in action. Economists of widely differing political persuasions would agree that, when the government imposes a tax on a good, the price of that good will rise. The normative question of whether this price rise is desirable is entirely distinct. Similarly, there would be substantial agreement that the following proposition of positive economics is correct: favorable weather conditions will increase wheat output, reduce the price of wheat, and increase the consumption of wheat. Many propositions in positive economics would command widespread agreement among professional economists.

Of course, as in any other science, there are unresolved questions where disagreement remains. These disagreements are at the frontiers of economics. Research in progress will resolve some of these issues but new issues will arise and provide scope for further research.

Although competent and comprehensive research can in principle resolve many of the outstanding issues in positive economics, no corresponding claim can be made about the resolution of disagreement in normative economics. Normative economics is based on subjective value judgments, not on the search for any objective truth. The following statement combines positive and normative economics: ‘The elderly have very high medical expenses compared with the rest of the population, and the government should subsidize health bills of the aged’. The first part of the proposition - the claim that the aged have relatively high medical bills - is a statement in positive economics. It is a statement about how the world works, and we can imagine a research program that could determine whether or not it is correct. Broadly speaking, this assertion happens to be correct. The second part of the proposition - the recommendation about what the government should do - could never be 'proved' to be correct or false by any scientific research investigation. It is simply a subjective value judgment based on the feelings of the person making the statement. Many people might happen to share this subjective judgment, for example those people who believe that all citizens alive today should be able to purchase roughly equal amounts of luxury and recreational goods after paying for the necessities of life. But other people might reasonably disagree. You might believe that it is more important to devote society's scarce resources to improving the environment.

There is no way that economics can be used to show that one of these normative judgments is correct and the other is wrong. It all depends on the preferences or priorities of the individual or the society that has to make this choice. But that does not mean that economics can throw no light on normative issues. We can use positive economics to spell out the detailed implications of making the choice one way or the other. For example, we might be able to show that failure to subsidize the medical bills of the elderly leads middle-aged people to seek a lot of unnecessary medical checkups in an attempt to detect diseases before their treatment becomes expensive. Society might have to devote a great deal of resources to providing check-up facilities, leaving less resources available than had been supposed to devote to improving the environment. Positive economics can be used to clarify the menu of options from which society must eventually make its normative choice.