Quantitative Methods are Incomplete When Used for Economic Analysis
Most economists today regard the use of mathematical and statistical methods as the key towards understanding the complexities of economics. They believe that in order to be scientific, economics should follow in the footsteps of natural sciences and primarily use mathematical and statistical methods, by which an economist establishes relationships between various variables. For example, personal consumer outlays are related to personal disposable income and interest rates. Economists presenting this relation as
C= a*Yd – b*i
where C is personal consumer outlays, Yd is personal disposable income, i stands for interest rate, a and b are parameters. For example, if a is 0.5, b is 0.1, Yd is 1000, and i, the interest rate, is 2 percent, then C will be 0.5*1000 – 0.1*2 =499.8.
Note that the parameters a, b are established by means of statistical method called the regression analysis. By means of another mathematical formulation some economists have established that the personal consumer outlays can be depicted as:
C= a*Yd a1*C(–1) a2*C(–2) a3*(Money/CPI)
where C(–1) stands for consumer outlays lagged by one month, C(–2) consumer outlays lagged by 2 months. Money stands for the stock of money and the CPI stands for the consumer price index a, a1, a2 and a3 are parameters.
How, then, do economists decide which mathematical formula they should accept as the valid formulation of the real world? For many economists the criteria for the selection of the “correct” formula is how well it fits the data. The higher the correlation the better. Unfortunately, a mathematical formulation cannot help us to ascertain the essence that drives consumer outlays.
A mathematical formulation for consumer payments just describes the observed outlays. It tells us nothing about the causes for these outlays. Ludwig von Mises noted, however, that to arrive at explanation we need to trace the change in the data back to previously established and identified phenomena.1
Furthermore, pursuit of quantitative analysis implies the possibility of the assignment of numbers, which can be subjected to all of the operations of arithmetic. To accomplish this, it is necessary to define an objective fixed unit. Such an objective unit, however, does not exist in the realm of human valuations. On this Mises wrote, “There are, in the field of economics, no constant relations, and consequently no measurement is possible.”2 There are no constant standards for measuring the minds, the values, and the ideas of men.
The main characteristic of human beings is that they are rational animals, using their minds to maintain their lives and well-being. The mind, however, does not follow automatic procedure, but rather individuals employ their minds in accordance with their own circumstances. Thus, it impossible to capture human nature by means of a mathematical formula. People have the freedom of choice to change their minds and pursue actions that are contrary to what was observed in the past. Because of the unique nature of human beings, analyses in economics can only be qualitative.
In addition, the employment of mathematical functions implies that human actions are set in motion by various f
Article from Mises Wire
