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impala76 Posted: Fri, Jul 20 2012 3:11 PM

Hello, I have some questions about AE. We know that empirical evidence is invalid in economics because Hayek tells us that social sciences are not valid fields for empirical study. But free market companies with operations involving thousands or millions of employees use empirical evidence in fields rife with human interactions. Examples are management, deciding how to allocate employees and teams to tasks, team dynamics, human resources, industrial hygiene, education and training sciences, and related fields. How are they able to address these complicated social interactions with empirical approaches?

Although the economy is much larger than any one company, what if we were to study a closed city or small island-state of a few thousand people, on the same scale as that which free market firms apply social sciences? Would that be a valid setting to apply empirical economics? I am absolutely certain it would not, but I'm trying to come up with an explanation.

Referencing thymology is one answer I've considered, but I want to explain why such firms are able to outcompete, or even stay on the market, against other firms. In an efficient market, their predictions should fail if they are based on empirical evidence, which Hayek proves is always unable to offer accurate predictions in social sciences. Thanks in advance for your response.

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Wheylous replied on Fri, Jul 20 2012 3:22 PM

I'll let someone else tackle other parts of your post, but I can address this:

Although the economy is much larger than any one company, what if we were to study a closed city or small island-state of a few thousand people, on the same scale as that which free market firms apply social sciences? Would that be a valid setting to apply empirical economics?

Remember that the goods they buy will come from outside the country too. Unless you want to stop all foreign trade. That would be disastrous. I guess you can conclude that :P

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Truth is its entrepreneurial risk.  Yes firms use as much data as they can find, but they still fail.  An individual firm can act because they know their business more than anyone else in the world and how their products react to decisions they make, but it still boils down to risk.  Look at apple computer, they failed (compared to sales and profits they make now) for like 20 years, but they made a risk in producing an mp3 player.  Now they are huge, but no individual firm can be that dominant in the long run because of failed risk (risks can include not taking them).

 

I think this answer your question.  You are making the assumption that businesses make correct decisions, but they dont always.  

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There is a difference between what you need to actually run a business, and what you need in order to understand the laws of economics.

To run a business, you have to know if you are making or losing money, and if your plans will make or lose money for you. So of course you need numbers of all kinds.

To understand economics means to understand what causes produce what effects.  Mises argued that numbers are not going help you find these out. Deductive reasoning is the way to go.

When a business uses numbers, it is not using them to discover laws of economics. 

Now one may argue that this is hairsplitting. Both the economist and the businessman are looking for predictions, one may claim. So why do numbers help the businessman predict, but not the economist?

Basically, the business man is interested in his particular situation, not in eternal universal laws that apply all over the globe for all time. Numbers can help him somewhat, because if his particular situation produced certain numbers, he may assume those numbers will more or less stay the same for a while, within reason. So he can make a prediction, for example, that if raising prices by 10% brought him 5% more in profits this month in this state, it will more or less do the same thing in other states.  

But the economist is looking for numbers that apply all the time, everywhere. And Mises claimed that no numbers can be found that apply in every time and place.

 

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"When a business uses numbers, it is not using them to discover laws of economics. "

Ya I think that's an important distinction to make.

 
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impala76 replied on Fri, Jul 20 2012 7:59 PM

Remember that the goods they buy will come from outside the country too. Unless you want to stop all foreign trade. That would be disastrous. I guess you can conclude that :P


Yes. But you can say the same thing about other free market social science applications, where multinational human resources and so forth are affected by trade and larger social factors. I want to know why market firms make social predictions on the global market but economists cannot.

But the economist is looking for numbers that apply all the time, everywhere. And Mises claimed that no numbers can be found that apply in every time and place.

I don't many economists are looking for "numbers that apply all the time, everywhere". If an economist isn't looking for "numbers that apply all the time, everywhere", can they apply empirical economics to make specific predictions? I know that they can't, but I'm working on the explanation. Thanks for the detailed post, by the way.

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If an economist isn't looking for "numbers that apply all the time, everywhere", can they apply empirical economics to make specific predictions? I know that they can't, but I'm working on the explanation.

Long answer:

Science is ultimately the search for repeating patterns in the universe. Math is a language that best describes patterns. It is also used to verify that a pattern is really there. Once we notice a pattern, we then try to break it down into its components, and waving our hands and invoking the principle of induction, claim that whenever you have the same components the pattern will repeat itself.

Mises pointed out that patterns that repeat themselves are possible when the components of the pattern are unthinking objects with no free will. But if the components are made up of people, who change their minds constantly, operating as they do from free will, it is very dubious to assume a pattern will repeat itself unless you have a sound reason that shows why people with free will choose to behave in the same pattern every time.

Thus the need for an economics based on deductive reasoning. Because math can describe a pattern, and verify that the data form themselves into a pattern. But it does not present arguments why a pattern should repeat itself in the future. If you skip a step, and use math to describe a pattern that existed in the past, with no sound reason to assume it will repeat itself, then you are wasting your time.

A business examines the past. Did we make money they we did things so far? It also predicts by assuming that the business climate in their particular slice of the world will not change, nor will peoples feelings toward their product. Obviously these are at best short term assumptions. But they have nothing better to go by, and in the short term, it might work.

But an economist who makes those same assumptions and crunches numbers based on them is being unfaithful to his position as a scientist. A scientist's job is to use only assumptions that have some reason for us to think them true.

Bottom line. If the economist can present, first, an acceptable reason why the pattern he is studying will repeat itself, then he can study the data and make predictions. I don't think economists do that usually.

One exception is the famous Skyscraper Index. Note that Mark Thornton provided a logical reason why this pattern exists, and will exist in the future.

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impala76 replied on Fri, Jul 20 2012 10:44 PM

Bottom line. If the economist can present, first, an acceptable reason why the pattern he is studying will repeat itself, then he can study the data and make predictions. I don't think economists do that usually.

So you think economists don't present an acceptable reason why the pattern they're studying will continue? Alright, I get that. But at the same time, you just linked me to a supposed Austrian Economics journal that has an article using empirical evidence. Heresy.

 

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Heresy.

He presents an acceptable reason. Did you read the article?

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impala76 replied on Fri, Jul 20 2012 11:41 PM

He presents a reason alright, and I don't necessarily agree with it because it only applies to certain recessions, but man, I thought Austrian Economics isn't supposed to admit empirical evidence of any kind for any reason. Let me go reread the sacred texts, but I think you're in the wrong here.

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impala76 replied on Sat, Jul 21 2012 10:29 AM

Maybe. At least we learned that Austrian Economics is supremely lubricious in its empirical evidence/social science rationalizations.

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impala76 replied on Tue, Jul 24 2012 12:45 PM

I should note that this very thread is an example of the hypocritcal statists here applying empirical evidence to social behavior. Forum members used inductive reasoning based on social observations of this "Mustang19" individual to determine that I was, in fact, him specifically. This is a flawed conclusion drawn from the empirical method that statists apply everyday to common social interactions.

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Wheylous replied on Tue, Jul 24 2012 1:09 PM

-_-

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Autolykos replied on Wed, Jul 25 2012 7:27 AM

Ban-Evader AKA Mustang19:
I should note that this very thread is an example of the hypocritcal statists here [sic] applying empirical evidence to social behavior. Forum members used inductive reasoning based on social observations of this "Mustang19" individual to determine that I was, in fact, him specifically. This is a flawed conclusion [sic] drawn from the empirical method that statists apply everyday to common social interactions.

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