Normative economics is a branch of economics that uses subjective value judgements to make policy recommendations. It is based on the belief that the government should intervene in the economy to promote the public good. Normative economics contrasts with positive economics, which is focused on describing economic behavior rather than making policy recommendations.
Normative economics considers a variety of factors when making policy recommendations, such as:
- Equity: Normative economics considers the distribution of resources and whether it is considered to be fair.
- Efficiency: Normative economics considers the level of efficiency in resource allocation and whether it can be improved.
- Economic Growth: Normative economics considers how to promote economic growth and how to ensure that economic growth is beneficial to all members of society.
- Stability: Normative economics considers how to ensure economic stability and how to prevent economic crises.
Example of Normative economics
One example of normative economics is the concept of a living wage. This concept is based on the idea that workers should be paid enough to meet their basic needs and have a decent quality of life. To determine the living wage, normative economists consider the cost of living in an area, the cost of basic necessities such as food and housing, and the average wages paid by employers. They then recommend that employers should pay a living wage to their employees in order to promote the public good.
Formula of Normative economics
Normative economics can be expressed as an equation: P = G(I,E,S), where P stands for policy, G stands for goals, I stands for inputs, E stands for evaluation, and S stands for stakeholders. The equation states that policy is a function of goals, inputs, evaluation, and stakeholders. In other words, policy is determined by the goals of the policy, the resources available, the evaluation of the impact of the policy, and the stakeholders affected by the policy.
When to use Normative economics
Normative economics is used when making policy decisions that involve value judgements. Normative economics is also used to assess the costs and benefits of potential policy decisions. It is used to evaluate the potential impact of a policy decision on the economy.
When making policy decisions, economists use a variety of tools, such as cost-benefit analysis, game theory, and decision theory. These tools help economists to assess the potential impact of a policy decision on the economy.
Types of Normative economics
There are four main types of normative economics:
- Utilitarianism: Utilitarianism is based on the principle that policy should promote the greatest good for the greatest number of people.
- Social Choice Theory: Social Choice Theory is based on the idea that policy should take into account the preferences of all members of society.
- Social Cost-Benefit Analysis: Social Cost-Benefit Analysis is based on the idea of weighing the costs and benefits of a policy in order to determine whether it should be implemented.
- Ethics: Ethics considers the ethical implications of a policy, such as whether it is just or fair.
Advantages of Normative economics
The advantages of normative economics are that it can help to create policies that promote the public good and make sure that economic resources are being used in the most efficient manner. Normative economics also helps to take into account the effects of economic policies on different members of society and make sure that policies are equitable and beneficial to all.
Limitations of Normative economics
In addition to its advantages, normative economics also has some limitations. These include:
- Lack of Objectivity: Normative economics is based on subjective value judgements, which can lead to biased or inaccurate policy recommendations.
- Difficulty in Measuring Results: Normative economics relies on difficult-to-measure outcomes, such as equity, efficiency, and economic growth. This can make it difficult to evaluate the effectiveness of policy recommendations.
- Uncertainty: Normative economics is based on uncertain predictions about the future, which can lead to incorrect policy recommendations.
Despite these limitations, normative economics can still be an effective tool for making policy recommendations. It can provide valuable insight into how to promote the public good and how to ensure equitable and efficient resource allocation.
Aside from normative economics, there are also a variety of other approaches that are related to making policy recommendations. These include:
- Cost-benefit Analysis: Cost-benefit analysis is a type of economic analysis that attempts to quantify the costs and benefits of a particular policy decision. It is used to compare different policy options and determine which one maximizes the net benefit.
- Social Welfare Functions: Social welfare functions are mathematical functions that attempt to quantify social welfare, which is the level of well-being in a society. These functions are used to determine the optimal levels of economic variables, such as taxes and government spending, that will maximize social welfare.
- Game Theory: Game theory is a type of mathematical analysis that is used to analyze how different players in a game interact and how they can best achieve their individual goals. It is often used to analyze markets and the behavior of firms in markets.
Overall, there are a variety of approaches related to normative economics that are used to make policy recommendations and analyze economic behavior. These approaches provide valuable insights into how to optimize economic policies and maximize social welfare.
- Mongin, P. (2006). A concept of progress for normative economics. Economics & Philosophy, 22(1), 19-54.