# Positive Economics History, Theory, Pros and Cons, and Example

> **Definition**
>
> Positive economics is an approach that focuses on objective facts and observations, rather than value judgments or policy prescriptions.

## What Is Positive Economics?

Positive economics refers to objective analysis in the study of economics. This process looks at what has happened and what is currently happening in a given economy to form a basis for future predictions.

Positive economics is different from [normative economics](https://www.investopedia.com/terms/n/normativeeconomics.asp), which is a form of study that uses value judgments to form a basis for future predictions.

### Key Takeaways

*   Positive economics is an objective branch of economics that relies on facts or what is happening.
*   Conclusions drawn from positive economics can be tested and backed up by data.
*   Positive economic theory differs from normative economics, which is more rooted in value judgments.
*   Positive and normative economics can work hand in hand when developing policy.

## Understanding Positive Economics

A cornerstone of positive economics is the development of theories through fact-based examination of causes and effects.

Many will refer to this study as "what is" economics due to its use of fact-based determinations and thinking. Normative economics, in contrast, is called the study of "what should have been" or "what ought to be."

## History of Positive Economics

The history of positive economics dates back to the 19th century. It was during this time that the idea of "what is" and "what should be" were first identified by early economists like John Neville Keynes and [John Stuart Mill](https://www.investopedia.com/terms/j/john-stuart-mill.asp).

Keynes believed that logic and methodology were imperative in the study of economics while Mill was an economist who blended economics with philosophy. Mill approached economics from data, such as the relationship between [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp), rather than from an approach of value perspective.

These early economists developed theories to back up their economic observations. They used factual evidence from economic conditions to prove these theories to be true.

These ideas were later adapted by contemporary economists, such as [Milton Friedman](https://www.investopedia.com/terms/m/milton-friedman.asp). Friedman is considered to be one of the most influential economists of the 20th century. He held a firm belief in the [free market](https://www.investopedia.com/terms/f/freemarket.asp) capitalistic system, and his theories became known as monetarism. Friedman was a strong proponent of [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp) and opponent of fiscal policy and [deficit spending](https://www.investopedia.com/terms/d/deficit-spending.asp), saying that they played a big role in the Great Depression.

> **Important**
>
> Although a combination of normative and positive economics helps policymakers devise solutions, positive economics is key to investment decisions because it relies on hard facts.

## Testing Positive Economic Theories

Conclusions drawn from analyses based on positive economics can be verified and supported by data. For example, the prediction that more people will save money if interest rates rise would be based on positive economics because past behaviors support that theory.

This analysis is objective in nature, as opposed to normative statements and theories, which are subjective. Most of the information provided by the news media is a combination of positive and normative economic statements or assumptions.

Positive economic theory can help policymakers implement normative value judgments. For example, it can describe how the government can impact inflation by printing more money, and it can support that statement with facts and analysis of behavioral relationships between inflation and growth in the [money supply](https://www.investopedia.com/terms/m/moneysupply.asp). But it doesn't say how to properly enact and follow specific policies regarding inflation and money printing.

Both positive and normative economics provide a clear understanding of public policies when studied together. These theories cover both the actual and real facts and statements combined with an opinion-based analysis. When making policy decisions, it is best to understand the positive economic background of behavioral finance and the causes of events as you include normative value judgments on why things happen.

## Advantages and Disadvantages of Positive Economics

There are distinct benefits and drawbacks that are associated with positive economics. Here we list some of the main advantages and disadvantages of this stream of economics.

### Advantages

Positive economics is based on objective data rather than opinions and value judgments. There are facts we have at our disposal to back up any of its claims. For instance, we can use historical data to determine the relationship between interest rates and consumer behavior. Higher interest rates lead consumers to stop borrowing because it means they have to spend more on interest.

Since it's based solely on facts and data, there are no value judgments in positive economics. This allows policymakers to formulate the appropriate measures necessary to tackle any economic conditions to move the economy in a certain direction. For example, the Federal Reserve can lower interest rates to prevent a [recession](https://www.investopedia.com/terms/r/recession.asp).

Individual opinions and emotions can have a big impact on economic policies and procedures. For instance, people often make decisions in their personal financial lives based on emotions rather than facts. This can lead people to make some bad choices. But if they follow the data, they may be able to make wiser decisions with their personal economic decisions.

### Disadvantages

Not everyone is concerned with the facts, and certain economic conditions are based on emotions. As in the example above, people often choose to overlook data when they make certain choices. Experts may suggest saving during times of economic weakness but individuals may decide they want to make a big purchase instead. In essence, it's hard to take the emotion out of economics.

Just because you have a history of data, it doesn't mean that you can come with up a fool-proof solution or conclusion. That's because economics, whether positive or normative, isn't an exact science. And there are other considerations that often come into play that can change the outcome.

Similarly, positive economics may not be a one-size-fits-all approach. For instance, policymakers often use data to come up with a policy or a solution that affects people differently. What works for one segment of the population doesn't affect others the same way. Raising interest rates may be necessary to help slow growth and is a boon for lenders but it doesn't bode well for borrowers, especially those who are already strapped for cash.

Pros

*   Is easily verifiable because it is based on objective data
    
*   Gives policymakers more power to make decisions
    
*   Allows individuals to make wiser choices with their economic and financial lives
    

Cons

*   We can't always separate our emotions from the facts
    
*   Economics isn't an exact science, so there are no fool-proof solutions or conclusions
    
*   Policies and solutions that arise from positive economics don't affect everyone the same way
    

## Real-World Example of Positive Economics

Consider the Fight for 15 movement, which calls for a $15 [minimum wage](https://www.investopedia.com/terms/m/minimum_wage.asp). On face value, this may be considered a policy proposal grounded in normative economics. After all, the stance that a $15 minimum wage is ideal represents a value judgment. Proponents argue that raising the minimum wage would be good, while opponents argue that it would be harmful. Several states and cities have passed laws to raise their minimum wages to $15 per hour, or even higher.

The actual effect of these policies is in the realm of positive economics. A study by the _Harvard Business Review_ compared department store wages in California, which was raising its minimum wage, with Texas, where the wage remained fixed.

The Harvard researchers found that found that, when California raised its minimum wage, the average worker's weekly hours decreased, but the total number of hours worked remained the same. In other words, employers hired more workers but cut back their average hours so that they would not have to pay for retirement and health benefits.

This data, with its objective assessment of the effects of a minimum wage increase, is an example of positive economics. However, the researchers conclude with a discussion of what policymakers can do to improve consistency in workers' schedules and productivity. Since this is a prescription of what _should_ be done, the conclusion is an example of normative economics.

## What Is Positive Economics in Simple Terms?

Positive economics is the objective analysis of the economic study. This involves investigating what has happened and what is happening, allowing economists to predict what will happen in the future. Positive economics is tangible, so anything that can be substantiated with a fact, such as the inflation rate, the unemployment rate, housing market statistics, and consumer spending are examples of positive economics.

## What Are the Differences Between Positive and Normative Economics?

While positive economics is a branch of economics that relies on objective data, normative economics is based on subjective information. The latter is based on value judgments that stem from opinions and personal feelings rather than analysis. Positive economics deals in what is, compared to normative economics, which relies on what economic behavior should be.

## What Is a Positive Versus Normative Statement?

There are big distinctions between positive and normative statements. Positive statements are objective theories that can be tested. Normative statements, on the other hand, are subjective. They involve the use of opinions and value judgments and are often based on personal opinions.

## What Are Examples of Normative Economics?

Normative economics is represented by anything that is subjective and value-based. This means we can use the information we have at our disposal to say what should be in the future. For instance, we can use data from earnings to say that corporations should pay more in taxes. And we can use the cost of living with current wages to make opinions on the minimum wage.

The branch of economic theory called welfare economics is an example of normative economics. The leading thinkers in this area early on were Abram Bergson and Nobel Prize-winning economist Kenneth Arrow.

## The Bottom Line

Economics is considered an art and a science, because it combines the use of objective fact with subjective judgments. Positive economics is an objective branch of study that allows conclusions to be made using verifiable facts.

Normative economics, on the other hand, deals with opinions based on those facts. Although it may seem like the best option, no society truly functions on a positive economic stances. In fact, combining both positive and normative economics may be the best approach when policymakers develop new solutions.

> **Article Sources**
>
> 1.  Policonomics. "[Positive economics](https://policonomics.com/positive-economics/)."
>     
> 2.  Britannica. "[John Neville Keynes](https://www.britannica.com/biography/John-Neville-Keynes)."
>     
> 3.  Policonomics. "[John Stuart Mill](https://policonomics.com/john-stuart-mill/)."
>     
> 4.  Foundation for Economic Education. "[The Great Depression According to Milton Friedman](https://fee.org/articles/the-great-depression-according-to-milton-friedman/)."
>     
> 5.  Fight for 15. "[About Us](https://fightfor15.org/about-us/)."
>     
> 6.  Harvard Business Review. "[Research: When a Higher Minimum Wage Leads to Lower Compensation](https://hbr.org/2021/06/research-when-a-higher-minimum-wage-leads-to-lower-compensation)."