According to modern economics, various ideas that we have established about the world of economics emanates from historical data. By inspecting the data, an economist forms a view regarding its behavior. As long as the theory seems to explain the data, it continues to be regarded as valid. Once it fails to adequately explain the data it is replaced by a new theory. Note that on this way of thinking a theory is derived from the data.
According to most experts, the sharp increase in the living standards in the western world in the past few hundred years could be attributed to the accumulation of technical knowledge.
This conclusion was reached by observing that for the thousands of years most people lived in great poverty, but since the 18th century there was a massive increase in prosperity, which economists attribute to the sharp increase in technical knowledge. (See McCloskey https://www.youtube.com/watch?v=1bmXI_pt9fQ)
Given this way of thinking it is not surprising that Paul Romer, this year’s Nobel Laureate in economics has concluded that the heart of economic growth is the result of an expansion in technical knowledge.
According to Mises,
Experience of economic history is always the experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment.[1]
To make sense of the data an economist must have a theory, which stands on its own feet, and did not originate from the data. By means of a theory, an economist could scrutinise the data and could try to make sense of it.
The key ingredient of such a theory is that it must originate from something real that cannot be refuted. A theory that rests on the foundation that human beings are acting consciously and purposefully fulfils this.
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