Positive vs Normative Economics: Key Differences Explained Clearly

what's the difference between positive and normative in economics and this is a concept that's introduced

early in economics textbooks because I think in a lot of ways this gets at the heart of the economist's identity

so economists like to think of ourselves as going after positive stuff rather than normative stuff so first of all

what are these what do these mean positive is intended to be just the facts you're just describing the world

as it is normative on the other hand involves value judgments and statements about

which should be so let's go through a few examples relating to these policy changes that

economists might consider so if we're thinking about the minimum wage a positive statement might be when this

state increased the minimum wage the number of workers hired in the low-skilled worker category went down

if that happened that would be a positive statement Now The Economist who presented that particular fact might say

we should not increase the minimum wage and they might point to this fact as one of the reasons they have this belief an

economist on the other side of the issue might say actually if you slice and dice the data differently when you increase

the minimum wage there was no decrease in employment among this particular group but a reduction of poverty rates

so those things are just facts it's just looking at what happened when this policy was introduced that's positive

facts and the second Economist would have the normative statement we should increase minimum wage so if you're ever

trying to figure out is this positive or is this normative one of the best questions to help you with that is is

the word should in there and if so it's definitely normative and if the word should is not in there you might say

could I rephrase this using the word should and if that's true then it's a value judgment it's about what should be

done it's normative with a gas tax policy the normative statement might be something like we should increase uh gas

taxes in order to reduce driving which will reduce carbon emissions and then the positive statements might be used to

back up any given position and a positive statement about the gas tax situation might be people drive less

when prices for gas are higher and you could look at all different types of data that might back up that positive

statement with student loan subsidies you might have an argument about the positive fact of whether other people

will get more education when the loan loan subsidies go up like two different economists with different opinions about

whether these subsidies could happen can argue about the facts instead of the the statement so they'll get into a deep

deep argument about when uh when subsidies go up do we see people getting more education or are there other

factors driving any correlation we see that might suggest this so economists spent a lot of time getting into

arguments about the facts and the causal relationship that's sort of behind those facts

and economists try to avoid normative statements now here's one of the potential problems we have which is what

about predictions now some of the nuances we have here when it comes to understanding these two

concepts come when you look at the idea that economists generate a lot of predictions

about the world so our predictions positive or normative and of course economists are going to argue that

they're positive and I think they are but I do think this is something we need to think carefully about and the other

thing here is the idea of social welfare if Economist says a certain policy like a tax policy on gas will increase social

welfare is that positive or normative because essentially that's saying I think we should increase that tax that

will make the population better off but are there value judgments that are built into that so let's let's think a little

bit about both of these so predictions are going to use facts about the world that are purely positive but they are

going to place those facts into a model about the economist's view of how the world works and that's really the the

wonderful thing about economics is economics forces economists to spell out what assumptions are they making how

does causality work in their particular worldview and they have to spell that out using an economic model

so this is one of the best things about economics in my opinion is that if you're coming up with um policy analysis

a lot of times people will focus on data and what the data says but there will be a whole bunch of assumptions behind the

way they translate any given correlation or piece of data into the way the world works and and that gets messy and can

translate into policy opinions or policy normative statements that are really not well-grounded where they have not

carefully evaluated their assumptions the fact that economists trust analyzes more when when analyzes come with a

theoretical model laying out their perception of causality means we are looking a lot more closely at our

assumptions making sure that our values aren't unintentionally built into our assumptions

so that's one of the wonderful things about economics now I think one of the real problems here comes when we think

about social welfare so social welfare is essentially the collective utility of everybody

and there's different ways you can aggregate that either you can just add up everybody's utility or you can think

of this as the utility of the group in the population that's worst off depending on whether you're utilitarian

or rolesian but one of the problems here is you have to come up with your opinion about other people's utility

and when you do that people tend to project their own personal values onto other people rather than deeply

understanding those other people's values so so when economists say that one policy will lead to higher social

welfare than another policy the assumptions about people's utility and which includes people's values and their

experiences that's built into that statement that higher social welfare will result from ex-policy than why

and so is that purely positive can you say that's purely positive if you've done a social welfare analysis but I

think one of the reasons that economists are so powerful and are hired so often in important positions is because people

doing that hiring are always afraid that whoever they hire from Academia is going to have a bunch of really strong

normative beliefs that they're imposing on their analysis whereas with economists because we take

so much pride in our positive analysis and in staying out of the normative and keeping everything in the realm of facts

and causal models and all that people trust us especially since they can actually look at our um our assumptions

at the bottom of our models and critique the assumptions whenever they want