Positive and normative economics

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

Positive economics deals 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: 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 economics offers prescriptions or recommendations based on personal value judgements which we want you to analise.

In positive economics, we hope to act as detached scientists. Whatever our political persuation, 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 judgements. We are concerned with propositions of the form: if this is changed then that will happen. In this regard, positive economics is supposed to be similar to the natural sciences to be learnt (such as physics, geology, or astronomy).

2. Here are some examples of positive economics in action. Economists of widely differing political persuastions 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; favourable 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.

3. 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.

4. 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 judgements, not on the search for any objective truth.