Positive and Normative Economics
People oftentimes hear politicians, the media and their friends say that, “the economy is bad” or “the economy is good”, but can an economy be good or bad? How can a mathematical computation be good or bad? How can two people’s functions intersecting at a point on a graph somehow be deemed good or bad? In all honesty, it really cannot. Economics is the study of the scarce allocation of resources, and does not have a good or bad side to it. It is people getting the most and best allocation that they can get in the system they live in.
Due to the desire of the population to apply subjective and emotional attributes to a mathematical study, economics was divided up into 2 branches of study called positive economics and normative economics.
Positive economics is economics that does not apply objectives to what an economy should be doing or what it “ought to be” doing. It ill describe equilibrium levels at certain prices and quantities but give no opinion on whether that is an appropriate price of quantity, It will examine the quantity theory of money and the interest rate while never stating whether an interest rate is good or bad. The “free market” is a system of unabridged interaction between every individual and mathematically maximizes personal and societal utility. In its pure form there is no objectives laid out for people’s interactions/actions except for the intentions those individuals have for themselves. In short, positive economics describes what an economy is and the interactions in it, without applying goals or values to them. Before positive economics was known as such, it was referred to as value-free economics.
Normative economics is the economic branch that tries to put goals on an economy through the control and regulation of what people do. When people say they think the economy is good or the economy is bad, they are using the normative economics mindset. In their mind the economy “ought” to be a certain way and things must be done to control people to make it that way. Whether they think the GDP is too low and therefore they encourage a government to tax money away to increase government consumption to raise the GDP, or they advocate a national bank to control the interest rate to “encourage borrowing” or “encourage spending”, they are pushing a normative economics policy.
In its root form, economics ought to be thought as in the positive sense. Due to people’s drive to control other’s interactions and actions a positive approach is generally taken and the general public thinks of economics in that regard as well.