My post of yesterday spoke of the "Power of Theory," and I discussed how sound theory enabled me to arrive at sound "perceptions" of an ordinary street scene in just another Indian city.
Today, I would like to write something more about this method of theorizing in the Science of Economics, and how it is very different from the methods of the natural sciences, particularly Physics. This is important because mainstream Economics tries to imitate the method of Physics - with disastrous results.
First, let us look at the role that "observation" played in my theorizing. The answer to that is: Nil. I did not use any observation - and I certainly did not "measure" anything - to validate my theories. Indeed, the theories were already in my head - and I used them to understand the world I was seeing with my eyes. This is very different from Physics, where "hypotheses" must be proven through observations and precise measurements, usually in a laboratory.
The Science of Economics arrives at theories in a completely different way. The approach followed consists firstly of "introspection." The idea is to find the "laws of thought" within one's own mind that guide "action." These laws of thought are the only real laws of Economics - like the Law of Demand. The theorist only assumes that all other human beings are possessed of minds like his own, that their "logical structure" is the same as his. This is a very humble position that the philosopher takes - unlike the "planners," who are assumed to be possessed of minds far superior to the rest of humanity.
A Science of Economics based on laws of thought common to all proceeds along "individualistic" and "subjective" lines. After all, it is only individuals who act; and their valuations are all subjective. We see this in ourselves. We see this in the world around us.
The purpose of sound theory is to be able to predict behaviour - and the Science of Economics does this very well; only, unlike Physics, the predictions are NOT "quantitative." All that can be predicted is "if this - then that" - that is, the predictions are "qualitative." There is no room for Mathematics. There is no use of Statistics. The Science of Economics is a purely "logical science."
Thus, to summarise, we start by looking into our own minds. We have no use for "observations" of the real world, or any "measurements." When we discover the laws in our minds that guide our actions we are possessed of "theory" that does NOT require empirical testing to prove or disprove it, as in Physics. This Economic Theory is validated by our own logic - for to think otherwise would be "illogical" to our own minds. This theory is valid and true "a priori." Further, it is valid for every acting individual, and therefore its predictions apply with what Mises called "apodictic certainty." But it has limitations. It cannot be quantitative.
Ludwig von Mises was a true "scientist," and all his works contain important lessons on the "methodology" of the Science of Economics. One of his earliest books, Epistemological Problems of Economics, dealt with these matters. The first 100 pages of his magnum opus, Human Action: A Treatise on Economics, concerns itself with how valid "knowledge" is found in this science. And Mises' last book, The Ultimate Foundation of Economic Science, returns to these vital issues of epistemology, issues that are completely ignored by the mainstream pseudo-economists.
If you want to study how economists of the Austrian School view their Science and its methodology, I recommend you read the first chapter - just 40 pages - in this introduction by Hans-Hermann Hoppe. I have also found the video of a lecture on the Austrian method by Professor Hoppe thanks to LewRockwell.com, and you can watch this here.
So sit back, and enjoy learning about this vital science. It is a very special and extremely precious branch of knowledge that will enable you to see the world we live in "scientifically." And don't worry. It is not at all difficult to master. Everything is quite simple and falls into place quite naturally. In the end, your own mind will be enriched. Happy learning.
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