What Is Normative Economics?

Normative economics is a perspective on economics that reflects normative, or ideologically prescriptive judgments toward economic development, investment projects, statements, and scenarios.

Unlike positive economics, which relies on objective data analysis, normative economics is concerned with value judgments and statements of what "ought" to be. It expresses ideological judgments about what may result in economic activity if public policy changes are made. Normative economic statements can't be verified or tested.

Understanding Normative Economics

Normative economics aims to determine people's desirability or the lack thereof to various economic programs, situations, and conditions by asking what should happen or what ought to be. Therefore, normative statements typically present an opinion-based analysis in terms of what is thought to be desirable. For example, stating that the government should strive for economic growth of x% or inflation of y% could be seen as normative.

Behavioral economics has also been accused of being normative in the sense that cognitive psychology is used to steer ("nudge") people to make desirable decisions by engineering their choice architecture.

As positive economics describe economic programs, situations, and conditions as they exist, normative economics aims to prescribe solutions. Normative economic statements are used to determine and recommend ways to change economic policies or to influence economic decisions.

Normative Economics vs. Positive Economics

Normative economics may be useful in establishing and generating new ideas from different perspectives, but it cannot be the only basis for making decisions on important economic issues, as it does not take an objective angle that focuses on facts and causes and effects.

Economic statements coming from the positive economics angle can be broken down into determinable and observable facts that can be examined and tested. Because of this characteristic, economists and analysts often practice their professions under the positive economic angle. Positive economics, being the measurable perspective, helps policymakers and other government and business authorities decide on important matters that affect particular policies under the guidance of fact-based findings.

However, policymakers, business owners, and other organizational authorities also typically look at what is desirable and what is not for their respective constituents, making normative economics an important part of the equation when deciding on important economic matters. Paired with positive economics, normative economics can branch into many opinion-based solutions that mirror how an individual or one whole community portrays particular economic projects. These kinds of views are especially important for policymakers or national leaders.

Examples of Normative Economics

An example of normative economics would be the statement: "We should cut taxes in half to increase disposable income levels." By contrast, a positive or objective economic observation would be, "Based on past data, big tax cuts would help many people, but government budget constraints make that option unfeasible."

Here are more examples of normative statements:

• Women should earn the same salary as men.
• People should drive electric cars instead of consuming fossil fuels.
• Companies should not use child labor.

Normative statements cannot be tested or proved, and they typically contain keywords such as "should" and "ought."

Real Examples

Normative economics come into play whenever policymakers use economic incentives to affect human behavior. A common example is sin taxes on alcohol and tobacco: rather than prohibit these vices, the government may simply impose a tax that discourages the undesirable behavior. These taxes imply a value judgment on the social value of alcohol and tobacco consumption.

Another interesting example includes the income gaps between men and women, or between workers of different ethnicities. Although these wage gaps were once uncontroversial, they are now recognized as a sign of the inherent unfairness of the prevailing economic system.

Wage gaps can be a demonstration of both positive and normative economics. For example, a study on the wage differential between thousands of employees would be an example of positive economics, if it does not attempt any policy prescriptions. But a study that tests different policies to reduce the gap would be normative economics because it makes a clear value judgment against wage gaps.

The Bottom Line

Normative economics aims to reach desirable outcomes. Unlike positive economics, normative thinking is explicitly value-driven, and based on the ideology and preferences of each individual economist. This type of economic thinking is often used by policymakers to influence the behavior of consumers and the public.