What they fail to appreciate is that data without theory is meaningless, and that any interpretation of economic data already presupposes a theoretical framework, whether the analyst knows it or not.

The following article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

For most analysts, if the gross domestic product (GDP) data shows an increase, then this is perceived as good economic news. Conversely, if the GDP data shows weakness, then this is regarded as a possible deterioration in economic conditions. Most analysts are data-driven. The reality for them is what they see.

Thinkers such as Ludwig von Mises questioned this way of assessing the state of the economy. For Mises, data is an historical display and, by itself, cannot provide the analyst with a genuine understanding of the nature of economic phenomena. He wrote,

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.

According to Mises, the economist must have a theory beforehand in order to make a sense of the data.

The Role of a Theory

Contrary to much popular thinking, economics is not about GDP or the CPI or any other economic indicator, but about human action, choices, and social cooperation. For instance, one can observe that people are engaged in a variety of activities. They perform manual work, drive cars, and they walk on the street and dine in restaurants. The distinguishing characteristic of these activities is that these activities are purposeful or goal-oriented. Individuals operate within a framework of ends and means; they use means in attempts to secure ends.

Purposeful action implies that individuals assess or evaluate means at their disposal against ends. At any point in time, individuals have an abundance of ends that they would like to achieve. What limits the attainment of ends is the scarcity of means. Hence, once more means become available, a greater number of ends, or goals, can be secured.