Critique of 2006 Nobel Laureate in Economics, Edmund Phelps

There is an excellent article up today on Mises.org concerning the business cycle theories of Edmund Phelps, the 2006 Nobel Prize winner in Economics Science. The article correctly points out the problems inherent in Friedman's and Phelps' theory of stagflation and the business cycle. Mr. Shostak illustrates periods of time, mainly 1948-1969 and 2000-2006, where there has been price inflation and a fall in the rate of unemployment. This is counter to the Phelpian business cycle theory that states that there is no long term trade-off between inflation and unemployment. The article calls Phelps and Friedman out on their constant use of statistical observation to justify and manipulate economic theory to suit a specific framework. What is lost in this empirical process of "theory" creation is the knowledge that in other epochs there may have been different scenarios that have arisen. In essence, no economic theory can be based on statistical data gathered from a single or even multiple occurrences. What is needed is a fundamental theory, much like that of the Austrian theory of the trade cycle, that is beyond statistical calculation and strives to structure a set of theories around human action and given economic laws.

I hold empirical data higher than many Austrian economists I have encountered. Empirical data is powerful in identifying problems and may also possibly prove certain theories not to be incorrect, proving them in the negative. That said, empirical data and statistical analysis can not prove economic theory in the positive sense and can not give any detailed contributions to economic theory. The latter is view shared by Hayek in his monumental work Prices and Production and Monetary Theory and the Trade Cycle as well as Ludwig von Mises in his opus magnus Human Action. Hayek in Monetary Theory and the Trade Cycle on page 31 cites the once well-known economic statistician and empiricist E. Altschul stating that

"in economics, especially, the final decision about the significance of a certain phenomenon can never be left to mathematical and statistical analysis. The main approach to research must necessarily lie through theoretically obtained knowledge."

Where Phelps and Friedman fail is their insistent "in-the-box" approach to economic theory and an unwillingness to structure a theory that is stripped from positive statistical analysis. As Mr. Shostak states in the article, statistical data can not be relied upon to form economic theory. The events of a specific era can not be generalized to all occurrences. This empirical approach to economic theory is the failure of Friedmanite-Phelpsian understanding of stagflation and is why Phelps supposed discoveries can not be applied to any other instance but the 1974-1975 stagflation. A true economic theory is applicable to all circumstances. It can explain the problems and successes of specific monetary and fiscal actions. As von Mises has shown, in the tradition of Menger and Bohm-Bawerk, only through understanding human action and fundamental laws of economics can individuals begin to piece together a solid theory. Theory must be based in human action and not on statistical observation. When will economists learn that this field is not a natural science?