In society, people tend to vary in their ideas and views. They are influenced differently by different events in different situations. Similarly, such events may or may not happen as expected and their explanations may or may not be by reference to facts. Based on this knowledge, economists have come up with two approaches to the study of economics: normative and positive economics.
Economists differentiate between positive and normative economics on the basis of whether the users of economic theory are concerned with causal relationships only or whether they intend some kind of intervention in economic activity to alter the course of that activity.
Positive Economics:
A positive statement is that which can be explained by reference to facts. Positive economics is concerned with the objective statements based on facts, circumstances and relationships in an economy, that is, objective consideration of what is happening or bound to happen with due reliance on prior evidence. It is therefore based on predetermined theories and principles (tested against evidence) of the discipline, for example, what is the effect of a reduction in the standard Value Added Tax (VAT) rate on government revenue or how does the public service early retirement programme affect government spending or how does a higher level of unemployment affect inflation or how does VAT on spare parts affect usage or how does the roads maintenance levy affect demand for diesel? Positive economics is supposed to be completely objective, limited to the cause-and-effect relationships of economic activity; it is concerned with the way economic relationships are.
Normative Economics:
A normative statement involves ethics and value judgments whose explanations are based on deeply held values or morals. It is concerned with expressions of value judgment(s) as to what one would like to happen (what ought to be). These judgments can be argued about but they cannot be settled by referring to predetermined principles which give predictable results (science) or reference to facts. Economists, for instance, may argue about the type of economic system or the standard of living in society they would like to see which is all about what ought to be and usually settled by choice; for example, should a free port encourage beneficial increase in economic activity or should government spending on defence increase or decrease and by what percentage or does taxation allocate resources more efficiently? All these questions have no predetermined answers and are therefore subject to value judgments and discussions.
Value judgments must necessarily be made; that is, possible objectives to be achieved must be ranked, and choices made among these objectives. Economic policymaking – conscious intervention in economic activity with the intent of altering the course that it will take – is essentially normative in nature. But if economic policy making is to be effective in improving economic performance, it must be rooted in sound positive economic analysis. Policy makers should be cognizant of the full range of consequences of the policies they recommend.
