Normative Economics
Definition
1) "...A body of systematized knowledge discussing criteria of what ought to be...; a system of rules for the attainment of a given end." [1]
2) "Economics that tries to change the world by suggesting policies for increasing economic welfare..."[2]
Normative economics concerns itself not with what is, but with what should be. It is focused on the ends rather than the means. Normative economics discusses the philosophical implications of economics, specifically value judgements and ethics.
History
Phillipe Mongin gives a history of normative economics, with three distinct forms. In his paper Is There Progress In Normative Economics he also proposes that contemporary normative economics might be moving into a new stage.
- First form: The first form of normative economics for Mongin is "old-style welfare economics", which is a simplification of Pigou's Economics of Welfare as being utilitarian.
- Second form: "New welfare economics" which appears in the 1930s is the second form of normative economics. This is clearer than old welfare economics, specifically about its premises. The Pareto Principle becomes one of the primary methods of determining whether something is improving welfare, and eventually creates a clear separation between optimality conditions and their applications to markets and economic policies. The Compensation Principle, which allows the gainers from an economic decision to compensate losers as long as everyone is still left better off, was also developed as a way to move beyond the restraints of pareto optimality but avioded utilitarianism and comparison of individual utility. However, the main ideas to come out of new welfare economics were the "fundamental theorems of welfare economics":
- Competitive equilibrium satisfies conditions for a pareto optimum, under relevant conditions.
- Any pareto optimum can be obtained as a competitive equilibrium after agent's initial endowments have been modified by suitible lump-sum transfers.
- Third form: The third for of normative economics is social choice theory and public economics. Social choice theory is a way that uses voting methods to study how individual choices can be aggregated into some sort of social preference. Kenneth Arrow's Social Choice and Individual Values contains the modern form of social choice theory which brings together elements of welfare economics and voting theory. Public Choice theory also termed Political Economy studies the behavior and motivations of politicians, voters, and government officials. Although public choice has its origins in positive economics, it often used for normative purposes to suggest policy and constitutional changes.
Famous Normative Economists
Amartya Sen
"I would argue that the nature of modern economics has been substantially impoverished by the distance that has grown between economics and ethics."[11]
In Economic Behavior and Moral Sentiments Sen discuss the distancing that has occured between normative and positive economics, which he believes is one of the major detriments to modern economic theory. He argues that ethical considerations have a bearing on human behavior and that influencing human action is a core part of ethics. Since welfare economics must have some role in affecting actual behavior ethics should have a greater role in welfare economics. Yet, historically, logistical (what Sen terms positive economics) has been allowed to greatly influence welfare economics, while the role of ethics in this topic has been largely ignored. There has been significant progress made by logistical approach in economics and much of it because the logistical approach has been so broadly used. Sen argues though that welfare economics can benefit greatly from the inclusion of ethical considerations. Descriptive economics, prognosis, and policy suggestions can all be improved by the inclusion of ethics. The study of ethics itself will also be further be enriched by the addition of economics as an area on inquiry.
Figure 1: A graph of efficiency vs. fairness[3]
