Normative vs positive analysis of policy

“Normative” and “positive” economics are old terms, that get abused constantly, used out of context (largely by me), and make philosophers dislike economists.  This is cool and all – but I think the is-ought distinction still provides a useful perspective on considering policy.  So I thought I’d quickly flesh that out.

A positive economic analysis is about comparing outcomes – describing what occurs and why, given shared definitions of what the key elements are, but not of how they are valued.  A normative economic analysis is about choosing from a set of outcomes – it requires valuing these elements of our analysis.

A nice example comes from income inequality measures!  A positive economic analysis of Gini coefficients would simply tell us what this statistical measure of dispersion in incomes says, and how it moves about when things change.  A normative economic analysis states that the Gini coefficient represents some underlying “social welfare function” (which embodies a series of ethical principles/assumptions) – and then asks what the “optimal” coefficient would be.  Making these ethical judgments is hard – so we have to be careful.  Furthermore, as a Gini coefficient is only a summary measure of a complicated set of trade-offs, choices, and other potentially areas of ethical principles (generally it is said Gini coefficient relate to abbreviated social welfare functions, which miss out many of the issues with regards to heterogeneity and the such that we may care about), some of these ethical assumptions may go unstated – which is why we have to be extra careful.

Confusion between economists discussing policy and many non-economists (but technical experts) discussing policy is this distinction – economists have a preference for discussing trade-offs and stating that the choice between them needs to be dealt with by further analysis.  Many non-economist experts start with a normative position (we SHOULD lower obesity, or the Gini coefficient, for example) and then work to try to “solve” from there.  This “normative economic” position is a lot more fraught, but we can’t pick an option without confronting it – in truth it requires a lot of analysis and understanding from a variety of disciplines.  Assuming it a prori is inappropriate.

This is NOT to say that normative and positive analysis are separable, and that economist’s work is value free.  James wrote a series of excellent posts on this back in the early days of TVHE (here, here, and here).  In fact, to reach a “conclusion” by definitions requires assumptions that have some value content.  However, the distinction is useful as it disciplines us to be careful with what we take from our models and to be cautious with how far we stretch results of our “ideal worlds”.

Given what “is”, it is a neat idea to ask what ethical/moral/value principals are being traded-between when we do policy.  Looking at an “optimal policy” along one moral dimension (which is what targeting a single thing, such as obesity or a Gini coefficient, is doing) is fundamentally unsound – and trying to shoe-horn other moral elements into analysis after presupposing the one is dominant is not much better.  Economists know this, we received a lot of grief when our analysis was used to start pushing the idea that each factor was payed its “marginal value” and therefore the allocation was just – turned out the authors who did go down this path were being ethically naive about policy!   The “equity-efficiency” trade-off that gets much bemoaned nowadays was simply economists reminding people that, even in an idealized state where we are all paid our marginal value, this is not the only ethical principle relevant for policy – in that way it has played an important role in focusing our questions and conditioning any advice economists give.