Most economic analysts believe that historic data is the key in evaluating the state of the economy. Thus, if a fact such as genuine gross domestic product or commercial production shows a noticeable boost, then the economy is stronger. Conversely, a decline in the growth rate says the economy is deteriorating.
It seems that a person can develop the state of financial conditions just by looking at the information. The so-called information that experts are taking a look at, nevertheless, is a screen of historical info. According to Ludwig von Mises in Person Action:
History can not teach us any basic guideline, concept, or law. There is no ways to abstract from a historical experience a posteriori any theories or theorems worrying human conduct and policies.
Also, in the The Ultimate Foundation of Economic Science, Mises argued that:
What we can “observe” is constantly just complex phenomena. What financial history, observation, or experience can inform us is truths like these: Over a definite duration of the previous the miner John in the coal mines of the X company in the town of Y made p dollars for a working day of n hours. There is no other way that would lead from the assemblage of such and comparable data to any theory worrying the elements determining the height of wage rates.
For that reason, to understand the data one needs a theory to guide the data interpretation. The purpose of a theory is to establish the essence of the subject of examination.
According to Ayn Rand, a theory is a set of abstract concepts claiming to be a proper description of reality or a set of standards for man’s actions.
In his The Philosophical Origins of Austrian Economics, David Gordon composes that Eugen von Böhm-Bawerk maintained that principles utilized in economics need to originate from the facts of reality, as they require to be traced to their ultimate source.
A theory that rests upon the concept that people are acting consciously and actively fulfils this requirements. That human beings are acting consciously and actively can not be refuted, for anyone that tries to do this does it consciously and purposefully– i.e., he opposes himself. Mises, the initiator of this technique, labelled it praxeology. The knowledge that human actions are mindful and purposeful permits one to make sense of historical data. According to Murray N. Rothbard:
One example that Mises liked to use in his class to show the difference between two essential methods of approaching human habits was in taking a look at Grand Central Station behavior during heavy traffic. The “unbiased” or “truly scientific” behaviorist, he pointed out, would observe the empirical occasions: e.g., individuals hurrying backward and forward, aimlessly at specific foreseeable times of day. And that is all he would understand. However the true trainee of human action would begin with the reality that all human habits is purposive, and he would see the purpose is to get from home to the train to work in the morning, the opposite during the night, etc. It is apparent which one would discover and understand more about human habits, and for that reason which one would be the authentic “researcher.”
Why Techniques of Natural Sciences Are Not Appropriate in Economics
Many financial experts think that the intro of the techniques of lives sciences such as lab experiments could lead to a major advancement in our understanding of the world of economics. Counters Rothbard:
This approach, briefly, is to look at truths, then frame ever more general hypotheses to represent the realities, and after that to evaluate these hypotheses by experimentally confirming other reductions made from them. But this method is proper only in the physical sciences, where we start by knowing external sense data and then continue to our job of looking for, as carefully as we can, the causal laws of habits of the entities we perceive. We have no way of knowing these laws directly; but fortunately, we might validate them by performing controlled lab experiments to check proposals deduced from them. In these experiments we can differ one element, while keeping all other appropriate elements continuous. Yet the procedure of building up knowledge in physics is always rather rare; and, as has actually occurred, as we become a growing number of abstract, there is greater possibility that some other description will be devised which fits more of the observed facts and which might then change the older theory.
While a laboratory experiments stand in the natural sciences, it is not so in economics. In the research study of human action, on the other hand, the proper treatment is the reverse. Here we start with the main axioms; we understand that guys are the causal agents, that the concepts they embrace by free will govern their actions. We for that reason begin by completely knowing the abstract axioms, and we might then build upon them by logical deduction, presenting a couple of subsidiary axioms to limit the series of the research study to the concrete applications we appreciate. Furthermore, in human affairs, the existence of free choice avoids us from carrying out any regulated experiments; for individuals’s concepts and valuations are continually subject to change, and therefore absolutely nothing can be held constant. The appropriate theoretical methodology in human affairs, then, is the axiomatic-deductive approach. The laws deduced by this method are more, not less, firmly grounded than the laws of physics; for considering that the ultimate causes are known directly as true, their consequents are also true.
While the researcher can isolate numerous particles he does not, nevertheless, know the laws that govern these particles. All that he can do is hypothesize concerning the “real law” that governs the behaviour of the numerous particles determined. He can never ever be specific concerning the “true” laws of nature.
Contrary to the natural sciences, the aspects pertaining to human action can not be separated and broken into their simple components. Nevertheless, in economics we understand that human beings are acting consciously and actively. This knowledge in turn assists us to understand the world of economics. The reality that a person is pursuing purposeful actions indicates that triggers worldwide of economics originate from humans and not from outside elements.
For instance, contrary to popular thinking, specific investments on items are not caused by genuine income as such. In his own distinct context, every specific decides how much of an offered income will be used for consumption and how much for financial investments. While it is true that people will respond to changes in their incomes, the action is manual. Every individual assesses the increase in earnings against the specific set of goals he wants to achieve. He may choose that it is more advantageous to him to raise his financial investment in financial assets instead of to raise his consumption.
Conclusion
Dependence on historical data as a foundation for the development of a view about the state of the economy is problematic. For the data can not produce much info about the realities of reality without a theory that “stands on its own feet” and is not derived from the information.
Such a theory ends up being a tool for the establishment of the facts of reality through the evaluation of the historical information. Numerous mathematical and analytical approaches can not help an expert in developing causes on the planet of economics. All that these approaches can do is to explain things. To ascertain the underlying causes, one needs a theory. For example, according to the financial theory individuals designate a greater significance to the consumption of products at present versus the consumption in the future.
This preference emanates from the truth that to maintain their lives and wellness individuals should take in at present instead of in the future. In this method of thinking, the interest rate can not be negative. If, nevertheless, we do observe unfavorable rate of interest, this discrepancy versus the theory raises the probability such rates originate from intentional central bank policies.