We Cannot Interpret Economic Data Unless We Know Economic Theory
Most economic commentators believe that historical data is the key in assessing the state of the economy. Thus, if a statistic such as real gross domestic product or industrial production displays a visible increase, then the economy is stronger. Conversely, a decline in the growth rate says the economy is weakening.
It seems that one can establish the state of economic conditions simply by looking at the data. The so-called data that analysts are examining, however, is a display of historical information. According to Ludwig von Mises in Human Action:
History cannot teach us any general rule, principle, or law. There is no means to abstract from a historical experience a posteriori any theories or theorems concerning human conduct and policies.
Also, in the The Ultimate Foundation of Economic Science, Mises argued that:
What we can “observe” is always only complex phenomena. What economic history, observation, or experience can tell us is facts like these: Over a definite period of the past the miner John in the coal mines of the X company in the village of Y earned p dollars for a working day of n hours. There is no way that would lead from the assemblage of such and similar data to any theory concerning the factors determining the height of wage rates.
Therefore, to make sense of 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 investigation.
According to Ayn Rand, a theory is a set of abstract principles purporting to be a correct description of reality or a set of guidelines for man’s actions.
In his The Philosophical Origins of Austrian Economics, David Gordon writes that Eugen von Böhm-Bawerk maintained that concepts employed in economics must originate from the facts of reality, as they need to be traced to their ultimate source.
A theory that rests upon the idea that human beings are acting consciously and purposefully fulfils this criteria. That human beings are acting consciously and purposefully cannot be refuted, for anyone that tries to do this does it consciously and purposefully—i.e., he contradicts himself. Mises, the initiator of this approach, labelled it praxeology. The knowledge that human actions are conscious and purposeful all
Article from Mises Wire