Increasing economic efficiency rarely makes everyone happy, because most policies help some people and harm others

The first stage of analysis is to ask: What is going to happen if we adopt this policy? This calls for a purely objective analysis, describing and forecasting the effects of the policy. For instance, you can use the supply-and-demand framework to predict the likely consequences of raising the minimum wage. You can use it to forecast the number of people who’ll get a pay raise, to estimate how much their pay will increase, to assess the effects on the profitability of employers, and to predict how many jobs businesses will eliminate due to these higher wages. An in-depth analysis might even detail the characteristics of those who’ll gain and lose from such a policy. This type of inquiry, an assessment that describes what is happening or predicts what will happen, is called positive analysis.


Stage two: Normative analysis assesses what should happen.

The second step asks: Which is the better outcome, and what policy should the government adopt? Answering this question requires a value judgment about which outcome is better. In the first step, economists merely describe likely effects. The second step requires making a judgment. What should be done? Whenever you opine on what should happen—whenever you use words like should or ought—you’re doing normative analysis, because your conclusions rest on normative, or value judgments.

Think about the minimum wage: Should it be raised or not? Positive analysis is helpful, because it lays out the likely consequences of the policy, outlining who’ll gain, who’ll lose, and what the stakes are for all concerned. But to assess whether the policy is worth pursuing, you need to evaluate whether the gains to some people outweigh the losses to others, and that requires a value judgment. It depends on how you weigh the benefits of higher wages for low-wage workers against the costs of lower profits for employers and the pain of unemployment for those who lose their jobs. Whatever view you hold, I bet that at least one of your classmates has a different set of values and so comes to the opposite conclusion.