Economics as Positive or Normative Science

In this article we will explain whether economics is a positive or normative science, or both.

Economics is a social science. For economics to achieve the distinc­tion of a science it is absolutely essential, among other things that econo­mists are able to separate their views on what does happen from their views of what they would like to happen. To be able to distinguish between what is true and what they would like to be true, economists must recognise the difference between positive and normative statements.

In the words of R. G. Lipsey, “Positive statements mean what is, was, or will be. Normative statements concern what one believes ought to be. Positive statements, assertions, or theories may be simple or complex but they are basically about facts”.

Economics as social science is concerned with predicting or determining the impact of changes in economic variables on the actions of human beings. Scientific economics, normally referred to as positive economics, attempts to determine ‘what is’ or ‘what will be’. Positive statements, assertions or theories may be simple or complex, but they are basically about matters of fact.

Positive economic statements postulate a relationship that is poten­tially verifiable or refutable.

For example:

“If the price of fish were higher, people will buy less”. Or, “As the money supply increases, the price level will rise”.

Disagreements over positive statements can be handled by an appeal to the facts of life. We can statistically investigate (and estimate) the relationship between the prices of fish and its demand (sales), or between the supply of money and the general price level.

We can analyse the facts of our economic life to determine the correctness of a statement about positive economics. For example, the statement that ‘a cut in direct taxes increases consumption spending in the economy’, is a factual statement.

It can be confirmed or refuted by examining the available statistical evidence on the effects of taxation on spending. In short, positive economics seeks to identify relationships among economic variables, to quantify or measure the relationships, and to make predictions about what is likely to happen if a variable changes.

Normative economic statements, because they concern what ought to be are in-separately linked up with the philosophical, cultural and religious systems. A normative statement is, in the language of Lipsey, “one that makes, or is based on, a value judgment — a judgment about what is good and what is bad”.

For example, the statement that ‘people who earn large income ought to pay more income tax than people who earn low income’ is a normative statement. Normative statements reflect people’s subjective value judge­ments of what is good or bad.

Such statement largely depends on ethical considerations such as ‘fairness’ or ‘equity’ than any economic criterion (such as productivity or cost effectiveness). The actual economic effects of the tax structure, which relies on progressive taxes, is an aspect of positive economics.

The questions “what government policies will reduce unemployment” and “what policies will prevent inflation” are positive ones, while the question “ought we to be more concerned about unemployment than about price inflation” is a normative one.

Normative economics involves the advocacy of special policy alterna­tives, because it uses ethical judgments as well as a knowledge of positive economics. Normative economic statements are concerned with ‘what ought to be’, given the philosophical views of the advocate. Value judg­ments are often the source of disagreement about normative economic matters.

Disagreements over normative statements cannot be handled merely by an appeal to the facts of economic life. For example, two persons may differ in policy matter because one is a socialist and the other is a capitalist. They may agree as to the expected outcome of altering an eco­nomic variable (that is, the positive aspects of an economic issue), but disagree as to whether that outcome is ‘good’ or ‘bad’.

In contrast with positive economic statements, normative economic state­ments cannot be tested and proved false (or confirmed to be correct).

Let us consider the following three normative statements:

1. The government should increase its defence expenditures.

2. The business firms should not maximise profits. They should instead discharge their social responsibilities.

3. Trade unions should not increase wages faster than the cost of living.

It is not possible to scientifically test these normative statements, since their validity rests on value judgments.

Positive economics does not tell us which policy is the best one under the existing circumstances. The basic purpose of positive economics is to enhance “our knowledge of all policy alternatives, thereby eliminating one source of disagreement about policy matters”.

In the words of Grawtney and Stroup, “The knowledge that we gain from positive economics also serves to reduce a potential source of disappoint­ment with policy. Those who do not understand how the economy operates may advocate policies that are actually inconsistent with their philosophical views.”

Interdependence between the two statements:

Positive and normative views or statements cannot be looked at in isolation. Instead, there is interdependence between the two views.

On the one hand, our normative economic views can and sometimes do influence our attitude towards positive economic analysis. When we agree with the objectives of a policy, we often tend to overlook its potential liabilities.

It is important to note that desired objectives are not the same thing as workable solutions. The actual effects of policy alternatives often differ greatly from the objectives of their advocates. And the neglect of indirect effects is the common source of all fallacies.

For example, the Government of India may pass a new law forcing employers to double all wages. The basic objective might be to help workers. But, it is likely to lead to a fall in the demand for labour. Thus, the resulting drop in the number of workers employed would be disastrous. Of course the advocates of such a law would not want to believe the economic analysis that predicted the undesirable consequence.

On the other hand, sound positive economics will enable us to evaluate more accurately whether or not a policy alternative will, in fact, achieve a desired objective. The task of an economist is to expand our knowledge of how the real world operates.

If we fail to fully understand the implications, including the secondary effects, of alternative policies, we will not be able to choose intelligently among the alternatives. It is not always easy to isolate the impact of a change in an economic variable or policy.

Table 1 contains some positive and normative statements and questions:

Difference between positive and normative economics:

Economics is often divided into two major aspects: positive and normative. Positive economics explains how the world works. It is con­cerned with what is, rather than with what ought to be.

Normative economics is concerned with what ought to be rather than what is. It proposes solutions to society’s economic problems.

That there is unemployment in India is a problem of positive economics. What measures can be adopted to solve the problem is a problem of normative economics. Normative economics is also known as welfare eco­nomics.