Positive & Normative Economics: Concept, Differences & Examples

Positive economics

Positive macroeconomics is dedicated to the description and observation of economic facts without making subjective judgments or opinions. Its main objective is to analyze and understand how economic phenomena work in reality, using scientific methods and collecting empirical data. In this sense, positive macroeconomics is based on evidence and seeks to establish causal relationships and observable patterns in economic behavior.

Examples

1. The current unemployment rate is 20%.
2. Health expenditure accounts for 25% of the budget.
3. Inflation this year was 3%.
4. “The increase in the minimum wage has shown a negative correlation with the employment rate in various empirical studies.”
   In this example, positive macroeconomics relies on the observation and analysis of economic data to establish a causal relationship between the increase in the minimum wage and the employment rate.
5. “A country’s economic growth is positively correlated with the level of investment in human capital.”
   Here, positive macroeconomics focuses on describing an observed relationship between economic growth and investment in human capital, based on data and analysis.

Normative economics

Normative economics deals with describing facts and making value judgments about how those facts should be. Unlike positive economics, which simply observes and analyzes economic phenomena without making subjective judgments, normative economics goes further by formulating and stating the desirable reality.

In the field of normative economics, individuals express opinions about the positive and negative aspects of the development of an economic phenomenon, as well as how the variables that compose it could interact more effectively to achieve the best outcomes.

It is important to note that some scholars argue that economics will always be normative since they believe that any social reality is always based on value judgments and, therefore, lacks absolute objectivity. This implies that even in the most objective economic analysis, values and subjective opinions can influence the interpretation and formulation of recommendations or economic policies.

Examples

1. The unemployment rate should not exceed 5%.
2. Defense spending should not exceed 10% of the budget.
3. Social services expenditure should not be more than 40% of the national income.
4. “The government should increase spending on education to improve the quality of life of the population.”
   In this case, normative economics expresses an opinion about what is considered desirable, arguing that increased spending on education would have a positive impact on the quality of life of the population.
5. “A higher carbon emissions tax should be implemented to combat climate change.”
   Here, normative economics suggests a specific policy (higher carbon emissions tax) with the aim of addressing a problem (climate change) from an ethical or social perspective.

Differences and relationship between Normative and Positive Economics

Normative economics distinguishes itself from positive economics in that it not only observes but also expresses how things should be. However, they are also related because normative economics relies on the description and observation of facts provided by positive economics before issuing opinions.

Furthermore, the facts described by positive macroeconomics change only as a consequence of the application of normative economics, through the formulation and testing of theories.

Differences

Approach: Positive economics focuses on the objective description and explanation of economic facts as they are, using scientific methods and data analysis. On the other hand, normative economics goes beyond that by expressing opinions on how those economic facts should be.

Objectivity vs. Subjectivity: Positive economics seeks objectivity by relying on verifiable and observable facts, avoiding subjective judgments. In contrast, normative economics introduces values and subjective opinions when determining what is considered desirable or fair in the economic realm.

Relationship

Dependency: Normative economics is based on positive economics as its foundation. Before issuing judgments, normative economics requires the description and observation of economic facts provided by positive economics. Normative economics uses the data and analysis from positive economics to formulate theories, evaluate outcomes, and support recommendations or policies.

Feedback: At the same time, normative economics influences positive economics by posing questions and challenges that can lead to the formulation of new economic theories and models. Normative economics can propose ideal scenarios or recommendations that, once evaluated, can lead to a revision and improvement of the approaches and theories used in positive economics.

Example

An example of the contrast between positive and normative economics can be the different schools of economic thought that developed throughout history, mainly mercantilism and classicism.

Mercantilism, an economic doctrine that developed in the past, observes economic reality through positive economics but also constantly intervenes in it from a normative perspective. Mercantilism promotes economic policies that seek to strengthen the state’s wealth and power in relation to other countries. This is achieved through regulations and restrictions applied to trade and economic activity in general. These interventions are based on value judgments and opinions about how the economy should function for the benefit of the state (normative economics).

On the other hand, classical economics, led by economists like Adam Smith, presents a more positive economics-oriented approach. Smith argued that instead of intervening or altering economic reality, one should understand and study the natural laws that govern it. According to Smith, there is an “invisible hand” that links individual interests to the collective welfare. In other words, when people pursue their own benefit, they indirectly contribute to the general well-being and economic balance. This approach is based on the observation and description of economic facts (positive economics).