Why Quantitative Methods Fall Short in Economic Analysis

Interventionists insist markets require elite, educated technocrats to study and calibrate advanced models of the economy. Much like a physicist in a lab, they see themselves as scientific and data-driven, but as the Austrian School demonstrates, economics is nothing like the natural sciences.

The following article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

Most economists are in agreement that, through statistical and mathematical methods, one can organize historical data into a useful body of information, which can serve as the basis both for economic theory and assessments of the state of the economy. It is also believed that the knowledge secured from the data is tentative since it is not possible to know all the information and future empirical information might falsify previous theory.

Milton Friedman held that since it is not possible to establish how things really work, then it does not really matter what the underlying assumptions of a theory are. According to Friedman, what matters is that the theory can yield accurate predictions. For instance, an economist forms a view that consumer outlays on goods and services are determined by disposable income. Based on this view, he formulates a model, which is then validated by means of statistical methods. The model is then employed in the assessments of the future direction of consumer spending. If the model fails to produce accurate forecasts, it is either replaced or modified by adding some other explanatory variables. What matters here is how well consumer outlays are correlated with various variables. In this sense, all that an economist requires is to establish a good fit between dependent variables and various other independent variables.…