A Sounder Approach to Economics
It’s time we re-think our conventional approach to economics
Author: Robert Gilbert
The strength of an economy in a society could be determined by its ability to align and constantly re-align itself with a vast and always changing array of individual values, desires, and needs within the given society in the face of scarcity, or, more generally, the margin [by] and frequency [of] which it improves the human condition within a society with a limited amount of resources. Such a strength cannot be evaluated empirically by definition; the nature of individual values, desires, and needs is entirely subjective and can only be known and understood by the individuals themselves; the realization of these values, desires, and needs therefore cannot be identified and measured on any objective basis, or in any terms applicable to the human experience in general. Moreover, there is no empirical means of first viewing the various individual conditions within a given set of individuals and then abstracting from that set anything like a human condition. Further, the quality of such a general condition could never be measured objectively in the way objects are in the hard sciences.
The “new” economics
Despite its clarity, over the course of moving the field of economics toward the status of the hard sciences, the academic establishment has entirely neglected this truth and has, with all its models and statistics, transformed the field into an endeavor that treats the economy much like an object that can be manipulated, measured, and tested. By limiting this new economic endeavor to empirical observation and analysis, the academic establishment, while giving it the un-deserving appeal of that of the hard sciences, has prevented the development of any rational means of determining the strength of an economy. It has instead developed a purely empirical toolset that includes, for instance, the misleading Gross Domestic Product which solely accounts for total spending in a given economy and gives no indication of whether such spending effectively works to satisfy individual values, desires and needs, or the particularly favored employment rate which says virtually nothing about whether those resources employed work to effectively fulfill social demand.
Unraveling the un-sound fundamentals of the “new” methodology
In a hypothetical scenario, suppose the government invests tax dollars and coerces private banks into investing in a political pet project that employs a task force of say one million currently un-employed workers to construct and install a statue of the president in every big city. Working with our empirical toolset, such a measure would seem to strengthen the economy as both GDP and the employment rate would rise; but, of course, these empirical figures would fail to take into account the resources (both labor and capital) being diverted away from the private sector (which is most closely aligned with social preferences because of its immediate responsiveness to market feedback through the profit and loss mechanism) and to the hands of government officials who are responsive not to market feedback but to the whim of governmental policy. Clearly such an intuition requires something that our empirical toolset simply lacks.
Theoretical vs. Empirical
At any rate, the new economics and its rather supportive academic elite insist on working strictly with an empirical toolset. Clearly, this new conventional approach to economics is utterly misguided. The field of economics cannot rest on empirical grounds like fields in the hard sciences fundamentally because the focus in the field of economics, as often the case in other soft sciences as well, is an entity that extends beyond the empirical realm of consciousness. In other words, an economy, like any social system, isn’t present in the empirical world; with strictly empirical tools, before we can even get to analyze an economy, we are already unable to detect its existence because something as metaphysical as an economy can in no way be seen, heard, felt, etc. Moreover, an economy only exists within the conceptual world; the realization that anything like an economy emerges over the course of individuals trading goods and services can only follow theoretical reasoning and never empirical observation. The axiomatic foundation of economics, namely that individuals act in order to improve their condition, is one whose certainty rests on theoretical grounds and cannot necessarily be confirmed empirically.
Logic ought to be to the soft sciences what experimentation is to the hard sciences
So when seeking to unravel the inner-workings of various economic phenomena, we must begin with logic to form a causal theory which can then be tested against further questioning and reasoning; this can then guide empirical investigation. We must not begin with empirical data. For instance, when sorting through a list of historical economic data (i.e. prices, tax rates, interest rates, ect.) we are, unlike in the case of the hard sciences where we can utilize our immediately responsive empirical faculty, unable to isolate and control economic variables so as to discern the causal pathways that integrate the various economic data. Instead, we must form a causal theory from sound theoretical reasoning and employ this theory as a guide with which to investigate the given economic data. For instance, when analyzing an increase in the monetary base and an increase in capital goods prices, we must first employ causal theory (namely the Austrian theory of the business cycle) to guide our investigation of the causal correlation between these two phenomena.
Applying the right soft methodology
This soft methodology applies just as well to determining the strength of an economy. Instead of aimlessly looking at GDP, employment rates, and other empirical figures, we must work with theoretical reasoning. We must first define the background against which the strength of an economy can be determined. We can define this background as an economy’s ability to align and constantly re-align itself with a vast and always changing array of individual values, desires, and needs within a society in the face of scarcity, as mentioned previously. As also noted earlier, such an ability could never be determined objectively, as there is no universal background against which to judge both whether values, desires, and needs are satisfied and, if so, the degree to which they are satisfied; the alignment (and force thereof) between an economy and social preferences could never be located within a list of empirical data given that subjective value, with which this is all concerned, is naturally abstracted out.
Instead, we must employ pure theory to determine this ability. Firstly, we must understand that individuals act in order to improve their condition and that one means of accomplishing this (namely the economic means,) is by acquiring a subjectively valued good or service; the inner-workings of the process in which one improves his condition by acquiring a good or service unfold entirely within the subjective realm and are, for the moment, not of our concern. So instead of asking what particular good or service improves a given individual’s condition and why, we must ask what, according to reason, are the conditions under which every individual is able to most effectively improve his condition. Through logical reasoning, it becomes clear that in order for every individual to most effectively improve his condition, he must be free to pursue his objectives and to gravitate toward whatever goods and services he values, for the presence of any coercive obstacles is clear to hamper this process.
The emergence of an economy
Therefore, we can see that every individual is able to most effectively improve his condition under the conditions of freedom (an absence of coercion.) Following this, we must acknowledge that in order to improve his condition by acquiring a good or service that another individual possesses for instance (we’ll call this other individual Individual X,) the individual must in turn present a good or service that Individual X values in order to lay the groundwork for exchange. As we imagine the unfolding of an aggregated set of these individual exchanges within a society, we can see that values, desires, and needs will be expressed within and throughout the given society as individuals engage in free trade; the presence of social demand for particular goods and services as expressed within the society through un-hampered free exchange will, by itself, generate the incentive for other individuals seeking to improve their own condition (namely producers of goods and services) to fulfill this demand. In other words, individuals will benefit by benefiting other individuals; producers of goods and services within the economy will improve their condition most effectively by most effectively working to satisfy individual values, desires, and needs.
Therefore, according to the line of reasoning, the strength of an economy is determined by its ability to align itself with individual values, desires, and needs and an economy’s ability to align itself with individual values, desires, and needs is determined by the degree of freedom of individuals to act in the economy; in reverse, the more free individuals are to act in the economy, the more forceful the alignment between the economy and individual values, desires, and needs is, and the more forceful the alignment is, the stronger the economy is. Pure reason. We can then analyze empirical data through this theoretical framework. Surely, there’s plenty of room within this framework for improvement and new insights. Also, there are many other possible theoretical angles through which to determine the strength of an economy (for instance: resource allocation, efficiency, etc.) but the major point of this exercise is to demonstrate the role and importance of theoretical reasoning versus empirical observation in making such a determination.