It isn’t really Good Enough to “Look at the Data”
Data analysis can establish some information about correlations
According to well-known thinking, it is held that will by means of statistical and numerical methods one can organize traditional data into a useful entire body of information.
This in turn can serve as the foundation for the assessments of the condition of the economy. It is also kept that the reality is elusive. Hence, it is not possible to know its true nature.
Some scholars, such as Milton Friedman, hold that because it is not possible to establish how things really work, then it does not really matter what the actual assumptions of a theory utilized to ascertain the facts of actuality are. In fact anything will go, as long as the theory can produce good predictions. one Other theorists, such as Ludwig von Mises, hold that various items of data utilized by economists in their analysis are an historical display, which by itself cannot provide the economists with the facts concerning the real world. According to Mises, “ Experience of economic history is always the experience of complex phenomena. It can never convey understanding of the kind the experimenter abstracts from a laboratory experiment. ” 2
Economists do not just randomly arrange the data before starting a good analysis. On this Mises wrote, “ The arrangement of numerous price data in organizations and the computation of averages are guided by theoretical deliberations, which are logically plus temporally antecedent. ” 3
Moreover, “[i]t is vain to search for coefficients of correlation if one particular does not start from a theoretical insight acquired beforehand. ” 4
It seems that to make feeling of the data economists should have a theory which stands on its own feet and did not originate from the data as such. The objective of a theory is to establish the essence of the subject matter of investigation. In his “ Philosophical Origins of Austrian Economics” ( Mises Daily , June seventeen, 2006), David Gordon produces that Eugen von Bö hm-Bawerk maintained that concepts employed in economics must originate from the facts of reality— they have to be traced to their ultimate source.
A theory that rests on the idea that human beings are performing consciously and purposefully fulfils this criteria. That human beings are acting consciously and purposefully cannot be refuted, for anyone that tries to do this will it consciously and purposefully, i actually. e., he contradicts themself. Mises, the initiator of this approach, labelled it praxeology. According to Murray N. Rothbard, “[W]hile most things have no consciousness and therefore pursue no goals, it is an important attribute of man’s character that he has consciousness, and so that his actions are self-determined by the choices his mind makes. ” 5
The knowledge that human activities are conscious and purposeful allows one to make sense of historical data. According to Rothbard,
One example that Mises liked to use in his class to demonstrate the between two fundamental ways of approaching human behavior was in looking at Grand Central Station behavior during rush hour. The “ objective” or even “ truly scientific” behaviorist, he pointed out, would take notice of the empirical events: e. gary the gadget guy., people rushing back and forth, aimlessly at certain predictable occasions of day. And that is just about all he would know. But the accurate student of human motion would start from the fact that almost all human behavior is purposive, and he would see the purpose is to get from home to the teach to work in the morning, the opposite during the night, etc . It is obvious which one would discover and learn more about human behavior, and so which one would be the genuine “ scientist. ” six
Why Methods of Organic Science Are Not Applicable in Economics
Most economists are of the view that the introduction of the methods of natural sciences, such as laboratory experiments, could lead to a major breakthrough in our understanding of the field of economics. According to Rothbard,
This strategy, briefly, is to look at information, then frame ever more general hypotheses to account for the facts, and then to test these hypotheses by experimentally verifying various other deductions made from them. But this method is appropriate only within the physical sciences, where we all begin by knowing external feeling data and then proceed to our task of trying to find, because closely as we can, the particular causal laws of conduct of the entities we understand. We have no way of knowing these laws directly; but fortunately we may verify them by performing controlled lab experiments to test propositions deduced from them. In these experiments we are able to vary one factor, while keeping all other relevant factors constant. Yet the process of gathering knowledge in physics is definitely rather tenuous; and, because has happened, as we be a little more and more abstract, there is greater possibility that some other description will be devised which matches more of the observed facts and which may then replace the particular older theory. 7
While laboratory experiments are usually valid in the natural sciences, they are not in economics.
Within the study of human action, on the other hand, the proper procedure will be the reverse. Here we begin with all the primary axioms; we know that many men the causal agents, that this ideas they adopt by free will govern their particular actions. We therefore start by fully knowing the abstract axioms, and we may then build upon them by logical deductions, introducing a few subsidiary axioms to limit the range of the study to the concrete applications we care about. Furthermore, in human affairs, the existence of free of charge will prevents us from conducting any controlled experiments; for people’s ideas plus valuations are continually subject to change, and therefore nothing could be held constant. The proper theoretical methodology in human affairs, then, is the axiomatic-deductive method. The laws deduced by this method are more, not less, firmly grounded than the laws and regulations of physics; for because the ultimate causes are identified directly as true, their own consequents are also true. 8
Again, a laboratory is necessary in physics, designed for there a scientist can isolate various particles associated with the object of inquiry. As the scientist can isolate different particles, he does not know the laws that control these particles. All that he can do is hypothesize regarding the “ true law” that governs the behavior of the various particles identified. He is able to never be certain regarding the “ true” laws associated with nature.
According to Mises, “ The physicist does not know what electricity ‘ is. ‘ He knows only phenomena attributed to something called electricity. But the economist knows what actuates industry process. It is only because of this knowledge that he is in a position to distinguish market phenomena from other phenomena and also to describe the market process. ” 9
To appear scientific, conventional economists employ various quantitative methods. Thinkers such as Rothbard had serious misgivings concerning the usage of quantitative methods in economics. On this Rothbard wrote,
Not merely measurement but the use of mathematics in general in the social sciences and philosophy today, is an illegitimate transfer from physics. In the first place, a mathematical equation implies the existence of quantities that can be equated, which in turn implies a unit of measurement for these quantities. Second, mathematical relations are functional; that is, variables are interdependent, and identifying the causal variable depends upon which is held as given and which is changed. This methodology is appropriate in physics, where entities do not themselves provide the causes for their actions, but instead are determined by discoverable quantitative laws of their nature and the nature of the interacting entities. But in human action, the free-will range of the human consciousness may be the cause, and this cause generates certain effects. The mathematical concept of an interdetermining “ function” is therefore inappropriate.
Indeed, the very concept of “ variable” used so often in econometrics is illegitimate, for physics is able to reach laws only by discovering constants. The concept of “ variable” only makes sense if there are some things that are not variable, but constant. Yet in human action, free will precludes any quantitative constants (including constant units of measurement). All attempts to find out such constants (such because the strict quantity theory of money or the Keynesian “ consumption function” ) were inherently doomed to failure. 10
Again, contrary to the natural sciences, the factors pertaining to human action cannot be isolated and broken into their simple elements. However , in economics we all know that human beings are acting consciously and purposefully. This knowledge in turn could help us to understand the world of economics.
For instance, an integral role of money is to fulfil the role of the medium of exchange. An individual exchanges goods for money and then exchanges money for the goods of another individual. What we have here is an exchange of something for something.
In the modern world of the fiat money standard, we know that the increase in money supply results in an exchange of nothing for something. It results in a diversion of wealth from wealth generators to non-wealth-generating activities. This is certain knowledge and does not require empirical verification by scientific analysis. We also understand that for a given amount of goods an increase in money supply, all other things being equal, must lead to more money covered a unit of a good— an increase in the values of goods. (Note an amount is the amount of money per unit of a good. )
The complexity of the interaction of various factors means that there is no way for us to know the importance of each factor at any given point in time. Nonetheless, certain things such as for example changes in money supply, because they influence the prices of varied goods with a time lag, could provide us with useful information regarding events such as the boom-bust cycles and changes in the price indexes in the months ahead.
The fact that a guy is pursuing purposeful actions implies that causes in the world of economics emanate from human beings and not from outside factors. This means that mathematical methods are not going to be of much help here. For instance, contrary to popular thinking, individuals’ outlays on goods are not caused by real income as such. In his own unique context, every individual decides how much of a given income will be used for consumption and how much for investments. While it is true that people will respond to changes in their incomes, the response is not automatic.
Every individual assesses the increase in income against the particular set of goals he wants to achieve. He may decide that it is more beneficial to him to raise his investment in financial assets than to raise his consumption.
Conclusion
Reliance on historical data as a foundation for the formation of a view about the state of the economy could be problematic. For the data cannot produce much information about the facts of reality without a theory that stands on its own feet and is not derived from the data.
Once the theory passes the test of logic, it becomes a tool for the establishment of the facts of reality through the assessment of the historical data.
Various mathematical and statistical practices cannot assist an analyst in establishing causes in the wide world of economics. All that these techniques can do is to describe things. To ascertain the underlying causes one requires a logically worked-out theory.
After logical scrutiny, once it is established that the theory faithfully describes the essence of the world of economics, the theory can be employed in extracting the facts of reality from the historical data. Because the theory was not derived from the historical data as such, it can be utilized also to ascertain known reasons for the discrepancy between the data and the theory.
For instance, according to economic theory, individuals assign a greater importance to the consumption of goods at present versus consumption in the future. This preference emanates from the fact that to be able to maintain their lives and well-being people have to consume at the moment rather than in the future. By in this manner of thinking, the rate of interest cannot be negative. If, however , we do observe negative interest rates, this discrepancy with regards to the theory suggests that a possible reason for this is central bank monetary policies.
