Normative Economics

Value or normative judgments and opinion on economic policies

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What is Normative Economics?

Normative economics is a school of thought which believes that economics as a subject should pass value statements, judgments, and opinions on economic policies, statements, and projects. It evaluates situations and outcomes of economic behavior as morally good or bad.

Normative economics, as opposed to positive economics, tells us whether certain aspects of the economy are helpful or harmful. These evaluations are subject to the opinions of the people making the statements and are often without any basis or facts.

Normative Economics - Image of a word cloud with the word economics and related concepts

Examples of Normative Economics

  • The regulation of oil prices by the government helps to keep inflation in check.
  • The independence of the central bank from the government should be curtailed.
  • The development of Special Economic Zones is not working out.
  • Progressive taxation is better than regressive taxation.
  • Companies should be made to pay for the pollution they cause.

All of the above statements are subjective. They represent nothing more than an individual’s opinion on an economic situation or policy. Economists are often guided by their personal value systems while making such statements.

Welfare economist and Nobel laureate Amartya Sen distinguishes normative statements into two parts. According to him, basic statements do not depend on any knowledge of facts or theories, whereas non-basic statements depend on the facts or knowledge of facts.

Origin of Normative Economics

Normative economics first originated from “old-style welfare economics,” which is a simplified version of Pigou’s Economics of Welfare. “New welfare economics” came as the second form of normative economics in the 1930s. It used the Pareto Principle and the Compensation Principle to make normative statements about policies and state whether they were improving welfare or not.

The latest forms of normative economics are social choice theory and public economics. Public economics studies the effects of the public sector on society and the economy as a whole. The social choice theory uses the method of voting to aggregate individual choices to indicate social preferences.

Prominent Normative Economists

1. Adam Smith

Adam Smith was a Scottish economist, philosopher, and author in the 18th century. He is well known for two of his publications – “The Theory of Moral Sentiments” and “An Inquiry into the Nature and Causes of the Wealth of Nations.”

In “The Theory of Moral Sentiments”, Smith states sympathy as the initiation of action in society. His arguments about moral sentiments and sympathy as the foundation of rules and justice paved the way for modern normative economics.

2. Amartya Sen

Amartya Sen is a 20th-century Indian economist and a Nobel laureate. Sen tried to discuss the distinction between positive and normative economics in his book “Economic Behavior and Moral Sentiments.” He emphasizes the fact that since welfare economics have a significant impact on actual behavior, ethical considerations should have a greater role in welfare economics, which, according to him, have been largely ignored.

Normative Economics vs. Positive Economics

Positive economics, on the other hand, concerns itself with only stating facts and figures. It does not pass any judgment on any economic policy or economic behavior. The major difference between positive economics and normative economics is that the statements made by positive economics can be tested for their validity. They may either be true or false, but can always be tested. Conversely, judgments passed by normative statements cannot be tested for their validity because of their subjectivity.

For example, let us consider a positive statement, “The unemployment rate prevailing in the economy currently is 8%.” We know that there are measures to test whether this statement is true or not. Together with positive statements, normative statements help policymakers and leaders to reach opinion-based solutions to prevailing economic issues. Hence, both positive and normative economics play a vital role in the functioning of an economy.

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