Wednesday, August 18, 2010

Statistics are to Economics like Oil is to Water

Ludwig von Mises, one of the most influential contributors to Austrian economics, said that economics is really just a subset of praxeology.  I know, I’ve just thrown around some big words there, so I’ll elaborate: Mises believed that economics is about studying a specific kind of human behavior, which is what praxeology is (the study of human behavior).  In other words, economics is the study of the transactions that individuals make.

Given this simple concept, I have found myself fascinated by the attempts that are made by various groups, think tanks, and government agencies to find statistical measures.  Even more laughable is how the entertainment-driven news media likes to spin all of these statistics and measurements to further their own goals.  Oh, and don’t get me started with politicians.

Individuals of all political spectrums accept these statistics at face value and don’t ever question how they are measured or whether or not they have enough factors in place.  For example, did you know that the Dow Jones Industrial Average is really just the stock market index of the top 30 companies?  And that those 30 companies are a chosen elite but by no means represent the bulk of the economy.  Considering that roughly 98% of the people who are employed in the United States work for a company that has less than 100 people, I doubt that when the Dow Jones loses a few hundred points, it directly affects everyone.  Given the reactions of various media outlets, however, you’d think Jesus had come back and was eating everyone’s brains, due to an unfortunate misinterpretation of St. John’s visions.

It’s easy to determine economic outcomes when you limit your scope.  In reality, this is what statistics does.  It takes a small sample of larger population and runs mathematical calculations against the data.  Ideally, the sample is random and the larger the sample, the more accurate your data, but in reality, samples are often skewed, intentionally or not (opinion polls are the worst, as I’ve already pointed out).  Unfortunately, economics is not exempt from the shortcomings of statistics, especially when there is no sample size big enough to accurately reflect the reality of the situation.

While I am keenly interested in the subject of economics, I tend to not bother with the statistical analysis and focus instead on the relational aspects myself.  That doesn’t make me an expert, but it certainly does beat predicting the nature of the animal spirits.  Before the housing collapse, I saw how housing was increasing at a rapid rate and I realized that there was an upper limit before people stopped buying homes.  There is only so much debt a person is willing to get into before they stop (usually those who don’t have some kind of mental illness or are just plain stupid).  At that time, my parents told me about a condo that was for sale and that I could probably buy it if I wanted it.  I declined and it looks like that decision was sensible from where I stand.

The truth is, the best indicator of the economic times is to observe what the trends are.  Pay careful attention to what people are willing to into debt for and how people are handling their spending.  Common sense, the most uncommon kind of sense in our postmodern age, can easily dictate the direction that things are going in.  But it’s not an exact science, in fact it’s not really science at all, but merely educated guesses based on observational evidence.

And while it may not be ideal, it is probably just as accurate as mixing statistics with economics.  The downside is that you won’t sound official because you won’t have fancy charts or flashy pictures to illustrate your points.  But hey, if you spent your entire life trying to impress people, then you’d just be another worthless politician or blabbering blogger.


  1. Can anyone explain to me why people who know nothing about economics loves Mises? Is it because he's the only economist who says what non-economists want to hear? In biology, we call them "creationists."

    Also, this isn't the postmodern age, nor has it been for decades. You didn't even use it right, because what you're describing is postmodernism: a general rejection of intellectualism and institutionalized objective truth.

    You'll cringe when you find out what they're calling our current age of epitemology... post-postmodernism. It's too new for it to have a snappy name yet, so give it a few years (though by then it may be obsolete). If you want to understand where we're at philosophically, check out "Standpoint theory," and I hope you go beyond Wikipedia.

    I can't get over the fact you would rather use your judgment of what sounds right rather than observation through statistics. The Dow Jones isn't supposed to be a measure of the economy, it's a measure of the health of publicly traded companies across the major sectors of industry. What you're talking about is also tracked, though in seperate statistics and certainly not via only public traded companies, but people pay attention to the Dow because banks, retirement funds, and other large investors often have large stakes in those companies.

    I know your heart is in the right place... but seriously, fuck human instincts. The world seems flat, and look at how long we just assumed that. At some point, you have to acknowledge the experts who devote their life to something know more about it than you.

    I'm not saying have blind faith in experts, but you can't say "I don't get it," and then confidently claim it's wrong. If anything, I encourage you to dive head first, reading several different authors with several different opinions on the matter. I doubt you'll need much math, but it wouldn't kill you to learn any you do need.

  2. I love the claim that people who don't know anything about economics apparently love Ludwig von Mises. Especially in light of the fact that I never expressed any specific praise for him or all of his ideas.

    I also love how people who know nothing about how the data is gathered continuously rely on it as well. There were others I could have mentioned, like Unemployment, the CPI, or the GDP, all of which measure a fraction of what could be measured or are too subjective to be accurately measured (like unemployment). But then I'd sound too much like Vox Day and I'd rather people read "The Return of the Great Depression" to get a better idea of what those indicators entail.

    The Dow Jones only reflects the trade among the top 30 companies in America, and they don't employ more than 2% of Americans, if that. My point was that the reporting on those numbers is treated like God Himself had written it in stone when the reality it is hardly reflective of the health of the economy. Oh, and that trade is limited solely to the stock market, if I understand it correctly.

    But then again, to quote H.L. Mencken, "You may be right."


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