Positive and Normative Economics

The central problems of an economy can be solved in more than one way. Different mechanisms — such as the market, the government, or tradition — will produce different solutions. These different solutions lead to different allocations of resources and different distributions of the final mix of goods and services. So a natural question arises: which of these alternative mechanisms is more desirable for the economy as a whole?

Economics tries to answer this in two distinct ways. First, we analyse how each mechanism actually works and what outcomes are likely to result under it. Second, we evaluate those outcomes — we judge whether the results are good or bad, desirable or undesirable. This distinction between how something works and whether it is good is the basis for the two branches of economic analysis: positive economics and normative economics.

• Positive economics studies how the different mechanisms function. It deals with what is, was, or will be. Its statements are factual and can be tested against evidence. For example, "A rise in the minimum wage leads to a fall in employment among low-skilled workers" is a positive statement — it can be checked with data.
• Normative economics tries to understand whether these mechanisms are desirable or not. It deals with what ought to be. Its statements involve value judgments and cannot be tested purely by facts. For example, "The government should raise the minimum wage to reduce poverty" is a normative statement — it depends on what one considers fair or just. …