Definition
Normative economics is a part of economic study that expresses value or normative judgments about economic fairness or what the outcome of the economy or goals of public policy should be. It hypothesizes about what should occur in economic processes. Hence, it’s based on values and subjective beliefs, and prescribes what an economy should be like.
Key Takeaways
- Normative Economics is primarily focused on the outcome of economic behavior and asks what should happen in a particular scenario. It is value judgement based and subjective in nature, tackling questions that involve ethical and policy issues.
- Unlike positive economics, which is based purely on facts and cause-effect conclusions, Normative Economics involves personal opinion and individual viewpoint. It is founded more on ethics and theoretical scenarios, relying on ‘what should be’ instead of ‘what is’.
- The theories generated from Normative Economics are utilized primarily to create and implement economic policies, guidelines, and regulations. However, these theories and recommendations cannot be tested or verified due to their highly subjective approach.
Importance
Normative Economics is crucial in financial studies as it provides an evaluative framework for economic policies and events.
Through norms and subjective judgments, it offers recommendations on how things should work, reflecting personal perspectives on what the economy should be like.
It’s essential as it emphatically influences policy-making decisions and forms the basis of many political debates about economic distributions, moral issues, income distribution and economic justice.
It works on ideal situations and contributes to the formulation of new strategies or policies.
Therefore, its importance lies in questioning, evaluating, and judging the effectiveness and repercussions of economic policies, enabling improvements in economic systems.
Explanation
Normative economics aims to describe what the economic future should look like, as opposed to simply predicting what it might look like. By integrating judgments and subjective evaluations into economic discussions, normative economics allows individuals, organizations, and societies to make value-based decisions about resource allocation.
It helps us decide what is a ‘good’ or ‘bad’ outcome, rather than simply observing what ‘is’. This approach enables economic theories and policies to be evaluated and refined by utilizing a perceptual framework marked by the norms and values of the community. By posing questions like “What should the minimum wage be?” or “Should we increase taxes on the wealthy?”, normative economics provides the foundation for policy debates and decision-making in the public arena.
It aids in identifying the impacted audiences, the pros and cons of various options, and possible alternatives. This economic philosophy bridges economic analysis and decision-making, making it indispensable for understanding complicated issues and facilitating discussions surrounding economic policy.
Examples of Normative Economics
Normative economics involves value judgments about economic fairness or what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal. Here are three real-world examples:
Minimum Wage Policies: An argument that the minimum wage should be raised to ensure people can afford a certain standard of living is a normative economic statement. This reflects a judgement about the distribution of wealth in society, rather than describing inherent economic mechanisms. The effects of such a policy can be debated, but the decision to implement it is driven by normative considerations.
Progressive Tax Policies: A normative economics approach might also advocate for a progressive tax system, where those who earn more are taxed at higher rates. This is based on the belief that it is fairer for the rich to contribute more than the poor to public funding.
Environmental Regulations: Normative economics can be seen in decisions about environmental regulations, such as imposing a carbon tax or regulations on corporations to reduce pollution. These decisions are made based on the value judgement that clean air and a stable climate are worth the costs of such regulation.
FAQ: Normative Economics
1. What is normative economics?
Normative economics refers to economic perspectives or models that aim to determine what the economy ought to be like or what particular policy actions should be recommended to achieve a desired objective. It deals with the evaluation of economic outcomes based on normative, or subjective, judgments.
2. How does normative economics differ from positive economics?
While positive economics relates to “what is,” normative economics relates to “what ought to be.” Positive economics is fact-based, objective, and seeks to explain what happened or what is currently happening without making any judgments. On the other hand, normative economics includes value judgments and evaluates economic outcomes based on societal standards of ‘what should be’ rather than actual facts.
3. What are the examples of normative economics?
Examples of normative economics could include statements like: “The government should raise minimum wage to help low-income workers,” or “Taxes should be increasd on wealthy individuals to promote income redistribution.” These statements express subjective opinions about what policies the government should pursue.
4. Why is normative economics important?
Normative economics is crucial as it guides economic policies. Policymakers often rely on normative economic theories when deciding how to respond to certain situations. For instance, normative economic principles might be applied to decide whether to increase government spending during a recession. While positive economics can describe the potential effects of such a policy, normative economics can help determine whether this is a desired course of action.
5. Can normative economics be tested or verified?
No, normative economics cannot be tested or verified in the way we can with objective facts (positive economics) as they involve value judgements. These judgements are inherently subjective and can vary from person to person.
Related Entrepreneurship Terms
- Prescriptive Economic Policies
- Value Judgments in Economics
- Economic Fairness
- Economic Idealism
- Social Welfare Economics
Sources for More Information
- Investopedia: This website provides a wide collection of financial information and education resources, including articles and definitions of terms like Normative Economics.
- Corporate Finance Institute: This institute offers a wealth of knowledge on finance and financial analysis concepts, which include Normative Economics.
- Economics Help: This website provides information on a variety of economics topics and principles, Normative Economics included.
- Khan Academy: Khan Academy offers a vast range of free online courses and resources on various subjects, including economics. Normative Economics is among the concepts covered.
