Normative economics is the branch of economics that deals with the normative evaluation of economic theories, policies, and institutions. It asks the question “What ought to be done?
The public sector is the core of the economic theory of normative economics. The theory of public expenditures is based on a humanistic foundation and focuses on the legitimate functions of government and the appropriate goals of public policy. It largely ignores feelings of altruism, jealousy, and malevolence. Goodin explains this by discussing the “no envy” criterion. In other words, it has nothing to do with our interpersonal feelings but focuses on the value of a good or bad thing.
Normative economics focuses on the ideal state of an economy and suggests policies to improve economic welfare. Compared to positive economics, normative economics places more importance on value judgments and opinions and gives the “what should be” instead of the “what could be.”
Despite the popularity of normative economics, it cannot serve as the sole basis for making important decisions. It fails to take into account real cause and effect. The problem with normative economics is that it is difficult to apply to criticize a government, political party, or policymaker because it doesn’t focus on real cause-and-effect. Instead, decision-makers often look at economic studies that are positive and use them to make decisions.
Normative economics also tries to explain why some countries have more food than others. A country may be more capital-intensive than another because more foreign businesses are coming to the country. The same is true for a country’s economic policy. The EU is a good example. One of its policy makers is the EU. While a common economic principle, it may be a poor one. Normative economics aims to reduce poverty by encouraging the development of rural areas.