25 May 2010
Normative means as per the norms i.e. what we consider the right thing. Normative economics (as also in normative law - particularly important in international law) deals with what ought to be, rather than what is (this becomes positive economics).
Progressive taxation (in direct taxes)is an example of normative economics at work. It seems to be in the fitness of things that rich people should be taxed more than not so rich people. Some five decades back in many jurisdictions the tax rate in the highest slab was over 90%! This led to loss of incentive to produce and earn more. Finally the rates were lowered.
Normative economics would suggest the desirable sectors of economy to be encouraged. For example following Gandhian economics (a prime example of normative economics) India still has massive subsidies for Khadi and village industries. The subsidies distort the incentives and it is questionable if the subsidies are contributing as much to economic growth as they should. But normative economists would exclaim that growth is not everything. The subsidies are redistributing the resources in the right direction.
Please notice the expression "right direction"; normative economics is driven by value judgments.
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