According to the leader of the monetarists school, Milton Friedman, our knowledge of the world of economics is elusive. Consequently, it does not really matter what the underlying presuppositions of a theory employed to ascertain the nature of reality are. In fact, anything goes, as long as the theory can yield good predictions. By this thinking, any theory that is applied on historical data could be valid as long as it could produce accurate predictions. On this Friedman wrote,
The ultimate goal of a positive science is the development of a theory or hypothesis that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed….
…the relevant question to ask about the assumptions of a theory is not whether they are descriptively realistic, for they never are, but whether they are sufficiently good approximations for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.
Now, if the acceptance of a theory should be its forecasting capability, what about theories that do not generate quantitative forecasts? For instance, we can say confidently that, all other things being equal, an increase in the demand for bread will raise its price. This is true, and not tentative. Will the price of bread go up tomorrow, or sometime in the future? This cannot be established by the theory of supply and demand. Should we then dismiss this theory because it cannot predict the future price of bread?
Other thinkers, such as Ludwig von Mises, held that the various pieces of data utilized by economists in their analyses are an historical display, which, by itself, cannot be used to build economic theory. According to Mises,
…experience of economic history is always the experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment.
Moreover, “It is vain to search for coefficients of correlation if one does not start from a theoretical insight acquired beforehand.” Hence, to make sense of the data, an economist must necessarily have a theory beforehand. A theory that rests upon the view that human beings are acting consciously and purposefully—praxeology—fulfills this criterion. That human beings are acting consciously and purposefully cannot be refuted, for anyone that tries to do this does it consciously and purposefully—a performative contradiction. This foundation allows one to make sense of historical data. Ludwig von Mises, the initiator of this approach, labeled it praxeology. 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 the market process. It is only thanks to this knowledge that he is in a position to distinguish market phenomena from other phenomena and to describe the market process.
Following this view Rothbard held,
But while most things have no consciousness and therefore pursue no goals, it is an essential attribute of man’s nature that he has consciousness, and therefore that his actions are self-determined by the choices his mind makes.
Why Methods of Natural Sciences Are Not Applicable in Economics
Most economists believe that the introduction of the methods of natural sciences, such as laboratory experiments, could lead to a major breakthrough in our understanding of the world of economics. According to Rothbard,
This methodology, briefly, is to look at facts, then frame ever more general hypotheses to account for the facts, and then to test these hypotheses by experimentally verifying other deductions made from them. But this method is appropriate only in the physical sciences, where we begin by knowing external sense data and then proceed to our task of trying to find, as closely as we can, the causal laws of behavior of the entities we perceive. We have no way of knowing these laws directly; but fortunately, we may verify them by performing controlled laboratory experiments to test propositions deduced from them.
In contrast,
…while laboratory experiments are valid in the natural sciences, it is not so in economics. In the study of human action, on the other hand, the proper procedure is the reverse. Here we begin with the primary axioms; we know that men are the causal agents, that the ideas they adopt by free will govern their actions.… Furthermore, in human affairs, the existence of free will prevents us from conducting any controlled experiments; for people’s ideas and valuations are continually subject to change, and therefore nothing can be held constant. The proper theoretical methodology in human affairs, then, is the axiomatic-deductive method.
While the scientist can isolate various particles, he does not, however, know directly the laws that govern these particles. All that he can do is hypothesize regarding the “true law” that governs the behavior of the various particles identified. He can never be certain regarding the “true” laws of nature.
To maintain a scientific appearance, mainstream economists employ various quantitative methods. Thinkers such as Murray Rothbard had serious misgivings on the use of mathematics in economics. On this Rothbard wrote that,
…Not only 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 on which is held as given and which is changed….. But in human action, the free-will choice of the human consciousness is the cause, and this cause generates certain effects….. Indeed, the very concept of “variable” used so frequently in econometrics is illegitimate, for physics is able to arrive at 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).
Again, contrary to the natural sciences, the factors pertaining to human action cannot be isolated and quantitatively measured. However, in economics we know that human beings are acting consciously and purposefully. This knowledge helps us to understand the world of economics. For instance, a key role of money is to fulfill the role of the medium of exchange. An individual would exchange goods for money and then exchange this money for goods from another individual. What we have here is an exchange of something for something with the assistance of money. Individuals’ purpose or goal here is to secure goods. The individual employs means (i.e., money) to attain the goal (i.e., goods).
In the modern world where money is generated out of “thin air,” an inflationary increase in money supply results in an exchange of nothing for something. It leads to a diversion of wealth from wealth-generators to non-wealth-generating activities. This is certain knowledge and does not require empirical verification by a scientific analysis. We also know that for a given amount of goods, an increase in money supply, all other things being equal, must lead to more money paid for a unit of a good—an increase in the prices of goods.
The fact that an individual 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 useless here.
Conclusion
Reliance on historical data as a foundation for the formation of a theory of economics is problematic. The data are unique, historical, non-repeatable and it would be impossible to purely generate a theory from the empirical data since any who attempts to do so must presuppose a theory. Praxeology is both logically consistent and demonstrates a truth about the real world. Various mathematical and statistical methods cannot assist an analyst in establishing causes in the world of economics. All that these methods could do is to describe and quantify. Therefore, to ascertain causes one requires a sound theory.
