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3.1 Positive and normative economics

Economists frequently distinguish between 'positive' and 'normative' economics. Positive economics is concerned with the development and testing of positive statements about the world that are objective and verifiable. Normative statements derive from an opinion or a point of view. Thus the words 'should', 'ought to' or 'it is better to' frequently occur. The validity of normative statements can never be tested. Positive statements, on the other hand, can be tested, at least in theory, if not always in practice.

For anyone working in a management position it is helpful to distinguish between positive and normative statements. Managers and the people they work with, or are advised by, are likely to make liberal use of both, although normative statements may sometimes be disguised as positive statements. Whilst both types of statement may deserve attention, better management decisions are likely to result when the distinction between them is recognised.

It is often possible to rephrase normative statements in such a way that they become positive ones. For example, the normative statement 'the subsidies of the European Union's Common Agricultural Policy (CAP) should be removed' could be rephrased as the positive statement 'removing CAP subsidies will raise farm prices in developing countries'. The validity of the latter statement could, in theory, be tested.

Whether or not raising farm prices in developing countries is a good thing is another question. To say that 'raising farm prices in developing countries is a good thing' is a normative statement. On the other hand, the assertion that 'raising farm prices in developing countries will improve rural incomes in those countries' is a positive statement. Why? Because, again, it could, in theory, be tested. It does not say that rural incomes in developing countries ought to be raised, just that higher farm prices will have that effect.

To say that rural incomes should be raised is a normative statement, which you may well agree with, especially if you live and work in the rural areas of a developing country, or believe that increasing rural incomes is the best way to reduce poverty. On the other hand, if you live in the city of a developing country and believe that the removal of CAP subsidies will raise food prices, or if you are an EU food producer dependent upon CAP subsidies, you may feel differently about this - you may be less keen on raising rural incomes in developing countries, unless other ways can be found of achieving it.

You will notice that positive statements can often be broken down into a cause and an effect. Whether the effect is desirable or not is a normative question that will depend upon the subjective opinion of those affected. Economists practising positive economics can help analyse the effects in greater detail by breaking them down into positive and testable statements in the way we have done above. They can advise policy-makers in government, business, and other organisations both on the effects of specific policies and on the specific policies that need to be implemented in order to achieve desired effects. However, it is ultimately politicians and managers, and the people that empower them, that decide - on the basis of normative judgements - what is 'desirable' and what is not.

It is important to realise that economists practising positive economics do, however, make value judgements. Any analysis involves an element of subjectivity. In the first place, even what to analyse and how to analyse it often depends upon the subjective views of the analyst regarding what is, and what is not, important. Economic decisions have many different effects and it is rarely possible to examine them all in detail.

Indeed, whether to examine a problem from an economic perspective at all, or whether to focus instead on alternative perspectives, such as those provided by the disciplines of sociology, biology, or political science, depends in large part on normative/subjective views of the world.