NORMATIVE ECONOMICS: CONCEPT, EXAMPLES AND RELATIONSHIP WITH POSITIVE ECONOMICS - CULTURE VOCABULARY - 2025

The normative economics is the kind of economy that examines how an economy should work under ideal circumstances. Therefore, it involves value judgments and analyzes how the economy should be, rather than how it really is. For example, it suggests policies to improve economic well-being.

It considers that the economy as a subject should issue opinions on economic projects and policies. Evaluate the results of the economic procedure, rating them as good or bad.

It is subjective in nature and is concerned with "what should be." That is, it focuses on theoretical opinions and scenarios, rather than actual events. It can be useful if it is used by people who seek to generate new ideas from a number of aspects, if they intend to unleash real improvements and understand the key components of the economy and how wealth is created.

However, it should never become the sole basis for making important decisions, because it does not have an unbiased or objective view that focuses on real causes and effects.

Normative economic analyzes can be found at both the microeconomic and macroeconomic levels.

Normative economics concept

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Normative economics is a part of economics that expresses normative judgments regarding economic fairness, or what the economic outcome or public policy goals should be.

Normative means relating to an ideal standard or model, or based on what is considered the correct or normal way of doing something.

Therefore, normative economics shows a subjective analysis based on what is considered desirable. Thus, it could be considered normative to affirm that one should fight for a salary increase of z% or an interest rate of i%.

Behavioral economics has also been accused of being normative in the sense that cognitive psychology is used to "push" people to make desirable decisions through their architecture of choice.

Normative economics tries to provide solutions. Normative economic statements are used to influence economic decisions or recommend ways to improve economic policies.

Value judgments

We all have opinions and value judgments about problems and situations. Normative statements are subjective, as they involve setting objectives based on value judgments.

It is the economy that tries to change the world, suggesting policies to increase economic well-being. It is the opposite of positive economics, which is content to try to describe the world as it is, rather than point out ways to improve it.

"The minimum wage should be increased to $ 14 per hour" is a normative statement, as it is clearly an opinion. Normative economics takes a closer look at what an economy should look like in an ideal world and therefore employs value judgments.

For example, welfare economics has a purely normative branch, the aim of which is to find better ways to reach optimal conditions and balances to benefit a greater number of people.

Examples

Suppose scenarios are being analyzed because the government is considering reducing income tax by 40%. A normative financial statement could be the following:

“The government should reduce the income tax by 40%. It would help millions of people by increasing their disposable income.

The normative economic declaration entails a value judgment, since it assumes that the level of disposable income of people must be raised. It is not proven with factual values ​​or with any cause and effect that has been legitimized.

One might ask what good economics is if it cannot offer a course of action. The fact is that the positive economy offers a diagnosis, but leaves the procedure to the government and other policy makers.

Regulatory statements

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The following are examples of statements that can be attributed to normative economics:

- No person should have the right to receive an inheritance, because inheritances belong to society.

- The personal wealth tax should be introduced to reduce the disproportionate distribution of wealth.

- Investors must adopt a socially responsible investment approach. That is, do not invest in shares of companies that promote vice, such as tobacco, games of chance, etc.

- Tariffs should be increased on imports from countries with a low human rights record.

- Developing countries should adopt democracy as a system only when their population is educated and emancipated.

- The rich should pay a much higher income tax.

- Antitrust legislation does more harm than good.

- Social security pension payments must start at age 70.

- More lenient immigration policies will lower wages.

- Companies should pay for the pollution they generate.

Relationship between normative economics and positive economics

Economic science makes a distinction between positive economics and normative economics. The positive is the branch of economics that focuses on the description and explanation of economic scenarios.

For its part, the regulation deals with making recommendations on practical problems, including those related to public policies.

Positive economics is only interested in discovering the relationship between different economic indicators, such as interest rates, inflation, unemployment, etc. and provide conclusions based only on objective analysis, without offering any recommendations.

On the other hand, normative economics makes value judgments and recommends which policies should be adopted for the greatest benefit of the greatest number of people.

Both positive economics and normative are important. For example, politicians can arrive at a value judgment that income should be distributed more equitably, reaching this conclusion using normative economics.

Objective vs subjective

Positive economics faces facts that can be answered with practical analysis, without taking a position. On the other hand, normative economics addresses issues of equity and ethics that are subjective.

As a value judgment, normative economics stands in stark contrast to positive economics, which is objective rather than subjective in nature. The positive looks at what is happening in the economy and, although the statements are not necessarily correct, they can be evaluated and eventually proved or disproved.

Positive economics focuses on analyzing economic phenomena to answer the question "what is it?" Normative economics seeks to answer the question 'what should it be?'

Therefore, positive economics can be thought of as the purely scientific part of the economic discipline, objective and based on facts, while normative economics is more subjective to values ​​and is considered unscientific.

References

1. Higher Rock Education (2020). Normative Economics. Taken from: higherrockeducation.org.
2. Policonomics (2020). Normative economics. Taken from: policonomics.com.
3. Xplaind (2020). Positive vs Normative Economics. Taken from: xplaind.com.
4. Market Business News (2020). What is normative economics? Definition and meaning. Taken from: marketbusinessnews.com.
5. Will Kenton (2019). Normative Economics Definition. Investopedia. Taken from: investopedia.com.