Difference between Positive Economics, Normative Economics, and Welfare Economics

This article will help you to learn about the difference between positive economics, normative economics, and welfare economics.

Difference between Positive Economics, Normative Economics, and Welfare Economics

Positive economics is concerned with explaining what is, that is, it describes theories and laws to explain observed economic phenomena, whereas normative economics is concerned with what should be or what ought to be the things.

J. N. Keynes draws the distinction between the two types of economics in the following manner. A positive science may be defined as a body of systematized knowledge concerning what is, normative science or a regulative science is a today of systematized knowledge relating to criteria of what ought to be, and is concerned with the ideal as distinguished from the actual….. The objective of a positive science is the establishment of uniformities, of a normative science, the determination of the ideals. Thus, in positive economics we derive propositions, theories and laws following certain rules of logic. These theories, laws and propositions explain the cause and effect relationship between economic variables.

In positive microeconomics, we are broadly concerned with explaining the determination of relative prices and the allocation of resources between different commodities. In positive macroeconomics we are broadly concerned with how the level of national income and employment, aggregate consumption and investment and the general level of prices are determined. In these parts of positive economics, what should be the prices, what should be the saving rate, what should be the allocation of resources, and what should be the distribution of income are not discussed.

These questions of what should be and what ought to be fall within the purview of normative economics. Thus, given the profit maximization assumption, positive economics states that monopolist will fix a price which will equate marginal cost with marginal revenue. The question what price should be or ought to be fixed so that maximum social welfare is achieved lies outside the purview of positive economics.

Similarly, given the monopoly in the labour market, positive economics explains what actual wage rate is determined. It does not go into the question how much wage rate should be paid to the workers so that they should not be exploited. Likewise, how national income between different individuals is distributed falls within the domain of positive economics. But positive economics is not concerned with the question of how income should be distributed.

On the other hand, normative economics is concerned with describing what should be the things. It is, therefore, also called prescriptive economics. What price for a product should be fixed, what wage rate should be paid, how income should be distributed, etc., fall within the purview of normative economics.

It should be noted that normative economics involves value judgements or what are simply known as values. By value judgements or values is meant the conceptions of the people about what is good or bad. These conceptions regarding values of the people are based on the ethical, political, philosophical and religious beliefs of the people and are not based upon any scientific logic or law.

Because normative economics involves value judgements, eminent economist L. Robbins contended that economics should not become normative in character. He opined that it was unscientific to include the value judgements in the economic analysis. To quote him, “the role of the economist is more and more conceived of as that of the expert, who can say what consequences are likely to follow certain actions, but who cannot judge as an economist the desirability of ends”.

While drawing difference between economics and ethics he further writes, Economics deals with ascertainable facts, ethics with valuations and obligations. The two fields of inquiry are not on the same plane of discourse. Between the generalisations of positive and normative economics, there is a logical gulf fixed which no ingenuity can disguise and no juxtaposition in space or time bridge over. Propositions involving the verb ‘ought’ are different in kind from propositions involving the verb ‘is’.

Value judgements of various individuals differ and their rightness or wrongness cannot be decided on the basis of scientific logic or laws. Therefore, in our view, positive economics should be kept separate and distinct from normative economics. However, from the fact that normative economics involves value judgements, it does not mean that it should be considered as useless or not meaningful and should not be the concern of economics.

As a matter of fact, many vital issues concerning economic welfare of the society necessarily involve some value judgements. If economics is to become an ‘engine for social betterment, it has to adopt certain norms, ideals or criteria with which to evaluate economic policies and pass judgements on what is good and what is bad from the viewpoint of social welfare. We agree with A. C. Pigou, “Our impulse is not the philosopher’s impulse, knowledge for the sake of knowledge but rather the physiologist’s knowledge for the healing that knowledge may help to bring.

As is clear from above, normative economics is concerned with welfare propositions, since what is good or what is bad ultimately depends upon its effect on the welfare of the individual and the society. In recent years, a branch of economics known as welfare economics has been developed. This welfare economics seeks to evaluate the social desirability of alternative social states or economic organisations.

Thus, Sotitovsky writes, welfare economics is that branch of economic analysis which is concerned primarily with establishment of criteria that can provide a positive basis for adopting policies which are likely to maximise social welfare In short, welfare economics is to prescribe criteria or norms with which to judge the desirability of certain economic re-organisatiom and prescribe policies on that basis.

However, an important difference between positive economics and welfare economics may be noted. The propositions or laws of positive economics are derived from a set of axioms. Whereas the propositions or laws so derived are capable of being tested and verified by observations of the facts in the real world, the propositions of welfare economics cannot be so tested and verified because we cannot know whether welfare has actually increased or not.

This is because welfare is not an observable quantity like price or quantities of goods, “it is a bird of another sort”. We cannot measure welfare in cardinal terms. Being subjective, welfare or satisfaction resides in the mind of an individual and, therefore, it is not capable of being measured in quantitative terms.

Further, there are still more difficulties in testing a proposition regarding social welfare because propositions regarding social welfare generally involve value judgements of some sort. Thus Graff is very right when he states, “the normal way of testing a theory in positive economics is to test its conclusions, the normal way of testing a welfare proposition is to test its assumptions.”

Therefore, to judge the validity of the welfare propositions we must test its assumptions or premises which invariably involve value judgements. To quote Graff again, “in positive economics, the proof of the pudding is indeed in the eating. The welfare cake, on the other hand, is so hard to taste, that we must test its ingredients before baking”.

From the above it seems that difference between positive and welfare economics is quite clear; in one case what man does without considering the favourable or unfavourable effects on others while in the other it is what he should do and must consider the favourable or unfavourable effects on others. But the distinction between positive and welfare economics is not as clear as it is supposed to be.

Every man does what he thinks is the best for him. It may be that he does often what others do not consider to be best for him. But in such cases the probability of a faulty judgement by others is equal to is own faulty judgement. Thus, fault being a common factor in both the cases it is reasonable to conclude that “what a man does’ and ‘what he should do’ are one and the same thing in every case and that there is no difference between positive and normative or welfare economics when judged from the individual’s point of view.

Although there is no difference between positive and welfare economics when judged firm the individual point of view, yet it is possible to make out a difference between the two by adopting a social point of view. Any course of action which may be best for an individual may not be best for the society.

Thus, there is a difference between what a man thinks best for him and what is best for the society. When a man does what he thinks best for him, he does not necessarily do what is best for the society. If the word ‘should’ is given a social connotation, the difference between ‘what is done’ and ‘what should be done’ becomes clear. Thus only by adopting the social point of view, the positive and welfare economics can be differentiated from each other.