Usefulness of Empiricism

Robert Murphy invokes Mises, who argues that history “does [not] permit [the historian to maintain] that an economic law was not valid in ancient Rome or in the empire of the Incas.” I agree that theory is immutable; what changes over time are the relevant conditions (i.e. which theory is empirically relevant may change over time). But, Mises may have been wrong to assert that, “[The historian’s understanding] must never contradict the theories developed by the nonhistorical sciences.”

Empiricism is useful in at least two ways,

  1. Let’s say that a phenomenon has many possible explanations. Take (price) inflation, for instance. For the sake of argument, assume that all the following explanations are internally consistent: (a) a larger supply of money; (b) a lower demand for money; (c) an output shock. Historical study will tell us which explanation is the relevant one. My interpretation of Mises is that this doesn’t fall under his methodological concern (theory is applied to historical interpretation, therefore we need to discriminate between theories and find the relevant one);
  2. What Misesian methodology may contest is the use of empiricism to falsify theory. But, say that through historical investigation we can determine that certain conditions existed at time t. We have a theory that predicts (i.e. explains) a specific outcome given specific conditions, or ab. If we observe a, but then observe outcome c, where cb, doesn’t this hint at the possibility that our theory is wrong? It suggests that the theory is not logically consistent.

An objection to the second point may be that this kind of observation is very difficult in the social scientists. That’s a valid objection, but I think that most people already accept it. Empirical studies tend to be scrutinized. Statistical methods are reviewed, and are oftentimes found wanting. But, I don’t see any reason why any of the above two uses of empiricism in economics are fundamentally (as opposed to practically) flawed.

Someone may argue that even if historical evidence can suggest a theoretical flaw, the task of falsification (proving a theory wrong) ultimately requires a logical refutation. But, humans are fallible beings, which is exactly why Austrians (especially Hayek) argue against hyper-rationalism. We may not always know how to logically disprove a theory, even if that theory is wrong. What empirical evidence can provide, then, is cause for reasonable doubt. If we assign some probability to the accuracy of a theory, evidence that suggests that the theory is wrong will lead us to revise that probability downwards. The stronger the evidence, the larger the downward revision.

Of course, that humans are fallible beings also means that our interpretations of the evidence have some likelihood of being wrong. That’s why, rather than strictly adhering to a single methodology, most economists are willing to embrace methodological pluralism (I’ve also seen it referred to as critical pluralism). Or, if they’re not, this would be a good starting point for a criticism of common methodology. To increase the probability of falsifying bad theory, we use various methodological tools — if one fails, we have others.

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