The Problem of Normative Economics

There are two ways of viewing economics; positive or normative.  The United States and other nations have a long history of pursuing normative economics.  Positive economics deals with the way things are and what is while normative economics is based upon value judgments and the desire to engineer factors to produce a particular outcome.  Normative economics lies at the root of much of the evils governments perpetuate against their people under the pretense of good public policy.  Popular examples of normative economics include cap and trade, global carbon taxes, subsidies to particular industries, bailouts, etc.  None of these initiatives are rooted in economic theory, or the foundation of positive economics, and simply create more problems than they solve because of this fact.  I recently spoke in class on this matter and said you cannot make good economic policy based on normative assumptions to which the teacher replied why not?  Needless to say I was appalled and even more so by the nodding heads in agreement with the professor.

My answer would be because it is not rooted in economic theory.  Of course this statement does not carry much weight to the average student or individual.  To most people normative economics is all they have ever known.  It is preached in all of our public school books and the intelligentsia laud this approach as the way to solve our problems.  But, it only creates more.  As governments continue to subsidize industries, offer them lines of credit, bailout with tax payer dollars, provided targeted tax incentives, etc the market is all the while creating more malinvestment.  Malinvestment is the misallocation of capital and other resources into normally unproductive ventures now seemingly advantageous due to the various measures that have been taken to satisfy a government’s normative economic policy.  Prime examples include the crash of 1929, John Law’s South Sea Bubble, Tulip Mania, Dot.Com bubble, and most recently the housing bubble.  All arose due to normative policies instituted by governments to achieve a particular goal but all the while were undermining the economic system.  Interest rates and monetary policy are powerful influences on the market and the slightest change can make a big difference.  In Laissez-faire economy such catastrophes would not have occurred due to the self regulating nature of the market.  However, that self-regulating mechanism has been largely dismantled due to the tens of thousands of pages of government regulations shackling the economy and not allowing it to perform its wealth maximizing and creating functions.  Governments simply lack the tools necessary to manage an economy and any government regulation simply leads to the increase in lobbyists who jockey for favors from our legislators which further undermines the free market system.