In order to establish the state of the economy, economists employ various theories. Yet what are the criteria for how they decide whether the theory employed is helpful in ascertaining the facts of reality?

According to the popular way of thinking, our knowledge of the world of economics is elusive — it is not possible to ascertain how the world of economics really works. Hence, it is held that the criterion for the selection of a theory should be its predictive power.

[Editor’s note: In this selection, Bastiat explains the role of capital in building wealth, and why it is moral and proper that owners of capital ought to collect interest on the capital they lend out. Excerpt from chapter 5, “Capital and Interest,” in The Bastiat Collection (Auburn, AL: Mises Institute, 2011), pp. 147–58. ]

Frederic Bastiat made a clear distnction between the good economist and the bad economist. For him, the good economist looks beyond what is immediately apparent and instead looks much further into the future.

In the face of illness and suffering, private markets for healthcare services allegedly fail. Since the 1960s, neoclassical economists have legitimized the regulation and collectivization of this sector under the term “market failure.” This assumption forms the foundation of the discipline of health economics and its attempt to replace the failed market using econometrics.

When Elizabeth Warren performs verbal, accounting, and economic distortions to claim that her cornucopia of government expansion plans will be paid for almost without any cost to anyone not tagged with the scarlet letter R (for Rich), she is following in President Obama’s footsteps. During his campaign, he derided John McCain’s tax and spending proposals for not adding up and claimed ethical superiority because his own plans were “fully paid for.” Of course, he then ramrodded through the largest unfunded government expansion in history.