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to the facts. Positive economics deals with cause-effect
relationships that can be tested.For example, consider this
statement: A high interest rate causes new housing starts todrop.
Notice that nothing is said about whether or not a high interest
rate is good or bad.No value judgment is stated or implied. The
statement only points out one possibleconsequence of a high
interest rate. We can check out the facts in the real economy
todetermine whether or not the statement is false.
Positive economic statements can be disproved or rejected by
reference to the facts.The unemployment rate is 5.3 percent is a
positive statement. Last year, the economygrew 2.2 percent is a
positive economic statement. An increase in investment spendingwill
cause the level of economic activity to rise by more than the
increase in suchspending is a positive economic statement. Each of
these statements deals with data,facts, and economic reality. All
value judgments are conspicuously absent.
Normative economic statements are quite different. Normative
statements are focusedon what we believe should be or ought to be.
In such statements, we express our
judgments about what is good and about what is bad, what is
desirable or undesirable,what is right or wrong. We make value
judgments and state our opinions rather than
confining ourselves to a description of the facts.
Normative statements are not testable. This means that it is
impossible to prove suchstatements false by referring to factual
evidence gained through direct experience andobservation. The
following is an example of a normative economic statement:
Theinterest rate is too high. Notice the value judgment. It is as
if we are saying that theinterest rate should be lower.
Two people can look at exactly the same interest rate and come
to a different normativeconclusion about it. For a person planning
to borrow money to build a new house, theinterest rate could be too
high. For a person saving for retirement that exact sameinterest
rate could be judged as being too low. There is no way we can use
thescientific process, with its appeal to factual evidence, to
disprove either of those
judgments. We agree or disagree, based upon our opinions.
Normative economic statements express a subjective opinion and
involve our valuejudgments about how things should be. The
unemployment rate of 5.3 percent is toohigh is a normative economic
statement. The economy should grow more than 2.2percent a year is a
normative economic statement. Government should do more tohelp
eliminate poverty is a normative economic statement. Each of these
statementsdeals with what we think should be and with making
judgments about the rightness orwrongness of various aspects of the
economy. With normative economic statements,reference to the facts
is conspicuously absent.
Now that we appreciate the difference between positive and
normative economicstatements, it is important for us to notice that
there is nothing absolutely wrong aboutdoing a normative analysis.
We just need to be very explicit about precisely which valueswe are
incorporating into our analysis. We need to identify and share
those values thatled us to the conclusion expressed and the action
advocated. We need to explain whywe believe something should be one
way rather than another. It is essential that wemake our position
clear so that everyone knows (especially ourselves) where
ourpositive analysis ends and our judgments begin.
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Actually, positive and normative economics complement each
other. We cannot do agood normative economic analysis unless we
have first done a good positive economicanalysis. Before we can
make a judgment about the desirability or undesirability or
anyaction or policy, we must first have a clear understanding of
the real consequencesassociated with such action or policy.
We use our values in establishing our goals. Positive economics
will help us determinewhether or not the actions we propose to take
will actually allow us to achieve our goals.For example, suppose we
believe that teenagers should have higher incomes. We evenhave an
idea as to how our goal could be achieved. We will support and
demand anincrease in the minimum wage. Will our idea work? Will an
increase in the minimumwage actually lead to an increase in teenage
income?
Just because we think and hope that our idea will work, does not
mean that it will. This iswhere a positive analysis of the minimum
wage can help us. It helps us to see what is. Apositive analysis
will help us see the real economic consequences of an increase in
theminimum wage. A positive economic analysis will help us answer
this importantquestion: Will an increase in the minimum wage result
in an increase in teenage
income?
When preparing to choose, we start the process with a positive
analysis so that we knowwhat the facts are and then we apply our
values in making the final decision. Positiveeconomics deals with
what is. Normative economics deals with what we think should
be.Positive economics deals with facts. Normative economics deals
with making value
judgments about what the economy should be like.
If we want to manage the basic economic problem better, then we
must be sure that ourvalues are clearly identified and stated aside
from our positive analysis. We need toknow what values people are
using to arrive at their conclusions, but we do not have toagree
with, or otherwise support, those values. In order to make good
choices abouthow to use our scarce resources to satisfy some of our
unlimited wants, it is necessarythat we keep our views about how
things should work in the economy separate from ourviews of how
things actually do work.
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