The difference between the positive and normative strand of economic theory is most lucidly found written in the book by John Neville Keynes, ‘The Scope and Method of Political Economy’, in which he calls the positive economics to be “….a body of systematized knowledge concerning what is” and distinguishes it from normative economics as being “a body of systematized knowledge discussing criteria of what ought to be…. a system of rules for the attainment of a given end”. The economic contributions of many economists such as Kaldor, Samuelson, Pigou, Hicks, and Arrow etc can be associated in their research effort with normative economic issues basing their works on the ideas of value judgments as a key tool for analyzing the public policies.
The course on normative economics involves plunging into topics of social choice theory such as the welfare economics, new welfare economics principles, economic analysis of taxation, distributional aspects regarding fair divisions, social welfare functions, its properties and formulations, voting theories with regards to their designs and mechanisms, bargaining theories and Nash equilibrium, and the role of cooperative game theory. The public policy issues are studied and aspects of public expenditure, economic incidence of taxation and risk bearing are critically analyzed. The public theories are required to be designed from an equity point of view, analysis of horizontal and vertical equity are applied. The case for provision of public goods are also dealt with in the course of normative economics along with the analysis of equitable cost allocation planning.
The course on normative analysis often requires a rigorous application of elements of game theory, formal reasoning, abstract mathematics, axiomatic reasoning, and construction formal and logical proofs. Often students require help in the area of conducting such social choice analysis as they require rigorous mathematical and logical treatments. Students also require a theoretical understanding of the social choice theories of various leading economists such as Bergson, Samuelsson, Arrow, Scitovsky, Kaldor, Hicks, Amartya Sen, Pareto and many more.
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