Economists and Data
The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways.
The Deductive Basis of Economics
The usefulness of empirical data in economics turns on the question of how economics best can be studied and understood.
The startling success of physics and chemistry over the last three centuries in mastering matter and energy has often blinded people to the fact that the question of how to approach a subject has more than one possible answer.
However, looking at some other established disciplines shows us that this is the case.
For instance, I don't know of anyone who suggests that the right way to gain a deep understanding of Shakespeare is to analyze the chemical composition of the paper and ink he used to compose his plays.
We don't expect to study geometry or logic in the same way as the physical sciences, either.
To determine that the three angles of a triangle add up to 180 degrees we don't measure thousands of real triangles.
In fact, the triangle of geometry is an idealized figure that we could not find in reality.
Or take the following syllogism: "All men are mortal. John is a man. Therefore, John is mortal." We do not have to wait around for John to kick the bucket to see that this is true. Should we discover that John is, in fact, immortal, we would have found that one of our premises was false. But the syllogism itself would still be true.
The question of why we can assert that the propositions of geometry and logic are true is open to philosophical and theological debate. But economics does not attempt to solve the riddle of why the human mind has a certain logical structure. To economics, this fact is an ultimate given of the science.
All sciences have limits, determined by what may be perceived from the vantage point from which they view the world. Physics, for all its pride in having reached back to "the origins of the universe," has only succeeded in explaining one physical state of the world in terms of an earlier one. To physics, the fact that there are things that can be described as physical states is an ultimate given. This is not a failure of physics -- it is only because a subject has limits that it can be a coherent subject. The alternative is to have a single subject named, perhaps, Everything. Human attempts to acquire knowledge in this fashion have not been very successful.
Because the subject matter of economics is human action, and because human action proceeds by plans formulated using logic, it is the logical structure of our own, human mind that is our chief exploratory tool. In this respect, economics has an advantage over physics and chemistry. We do not understand why matter and energy act as they do, only that they do so. (Certainly, we can explain some facts of their behavior in terms of more elementary facts. But however far back we take these explanations, we will ultimately hit a point where all we can say is, "Well, it just does behave that way.")
However, economics is different. We are human. (Well, at least I don't think mises.org has any extra-planetary readers yet.) The structure of our minds is like that of the minds of the economic actors (including ourselves) whom we hope to understand. We understand, in a basic, direct sense, what it is to choose, to suffer loss, to gain (however temporarily) happiness. Our chief tool in studying economics is our knowledge of what it is to be human, to prefer certain outcomes to others, and to act to bring about those preferred outcomes.
To see the centrality of the human mind to economics, let us look at a typical economic "event" -- for instance, a real estate closing on a piece of land. How can we best understand what has occurred?
Let us say we choose to examine this event from the view of physics and chemistry. The closing might be many miles from the land itself. Nevertheless, we diligently set up our instruments on both the land and in the bank where the closing is taking place. We collect all information on every atom and every bit of energy that we are capable of gathering. We pore over the data with the aid of the fastest supercomputers available. Still, it is hard to imagine that we could find anything tying the events in the bank to the piece of land in question.
Perhaps the old owner had never been to the property, and the new owners don't intend to go there either. No amount of observation of the property could discover the transaction that has occurred. What has happened is only real in that it is a real idea, believed in by the people involved. It is the meaning attached to the closing by those participating in it that makes it a transaction.
Now, let us say that this land is located in an area that undergoes rapid development. The value of the open parcel soars. The new owner now knows that he could sell his land for twice the amount he paid for it. But where would our intrepid physicists and chemists discover this fact? It exists only as an idea in the mind of one or more human beings.
The central concept of economics is the planned actions of real human beings, and it advances by analyzing the logic used in making those plans. This was recognized at the very founding of the Austrian School -- Carl Menger said, in his great work, Principles of Economics: "Value is therefore nothing inherent in goods, no property of them, but merely the importance that we attribute to the satisfaction of our needs..."
The attempt to make economics a "real" science by basing its study on "hard, objective data," such as physical quantities of goods, is to miss the subject entirely. It is as though we undertook a study of biology by limiting our research to the behavior of the sub-atomic particles making up organic bodies. We would never even detect that we were dealing with a living creature! All fields of study are, after all, investigating the same world. It is only the fact that they approach that world in different ways, through the use of different central concepts, that makes them different subjects.
The Uses of Empirical Data
Yet Austrians do employ empirical data. Both Mises and Murray Rothbard, firm believers in the a priori nature of economic theory, nevertheless cite empirical data in their works. Of course, as Mises points out, economic history is intimately concerned with the data of the market at particular times and places. But what place can data have in economic theory? I see three roles:
1) As evidence of the explanatory power of a theory.
A theory may be true a priori, and yet not explain anything about the real world. Mises points out this possibility when he mentions that economics could construct valid theories of a world in which having to labor is considered a boon rather than a burden:
The disutility of labor is not of a categorical and aprioristic character. We can without contradiction think of a world in which labor does not cause uneasiness, and we can depict the state of affairs prevailing in such a world. But the real world is conditioned by the disutility of labor. Only theorems based on the assumption that labor is a source of uneasiness are applicable for the comprehension of what is going on in this world.
Such a theory might be fun to construct, but would serve little purpose otherwise.
If we expect others, especially the general public, to have an interest in Austrian economics, the power of its theories to explain the events of the real world must be demonstrated. Rothbard's America's Great Depression is a masterful example of how to proceed in this fashion. The book is replete with tables of statistics. Yet these are not used to prove the Austrian theory of the trade cycle, but simply to illustrate its explanatory power.
2) Empirical data can act as a check on our abstract reasoning.
As Mises warned us, when employing abstract economic reasoning we are walking the razor's edge:
The method of imaginary constructions is indispensable for praxeology; it is the only method of praxeological and economic inquiry. It is, to be sure, a method difficult to handle because it can easily result in fallacious syllogisms. It leads along a sharp edge; on both sides yawns the chasm of absurdity and nonsense. Only merciless self-criticism can prevent a man from falling headlong into these abysmal depths.
Empirical data cannot disprove any economic theory. But a preponderance of data running against our theory may be a sign that we reasoned incorrectly, and an aid in our "merciless self-criticism." For instance, I might develop, on the basis of deductive reasoning, a theory that, all other things being equal, the value of a good is determined by the amount of labor that went into its manufacture. Now, cases that seem to contradict this idea can never be conclusive, as "all other things" are never equal. But if I continue to find a myriad of instances where this relationship does not hold, and I cannot explain why, then it is time to go back and check my reasoning. After all, at least some of the time we would expect that enough of the ceteris would be paribus that the data would support us.
It is important to note that it is only if I can find a flaw in my reasoning that my theory is overthrown. However, empirical data might serve as a warning that such a flaw exists.
3) Empirical data can be used as a tool for swaying those who are not adept at abstract reasoning.
Those who wish to remain "pure" might disdain such an avenue, and contend that, if someone can't follow a proper argument, well, too bad. However, if we wish to have an influence on policy, we must recognize that not all people are willing or able to follow chains of deductive logic. To win the day for the market economy, it is not enough that we persuade those who are already inclined to our view -- somehow, by whatever means we have available, we must move the prevailing ideology toward a laissez-faire position. Empirical data is one tool in our kit by which we can do so.
The danger here is, of course, that such data can cut both ways. This is why we must never lose sight of the fact that empirical data is auxiliary to reasoning in economic theory, not an equal partner, and certainly not a way to arrive at theories. But the data is so strongly on our side that, in my opinion, we are remiss not to employ it when it can turn public opinion toward the cause of liberty.