To Mises, Mitchell's Emphasis on the “Purely Empirical” Examination of Business Cycles Smacked of Historicism

As Mitchell points out, the main purpose of Persons’ three-curve charts was to improve forecasting and aid the social control of the economy (Figure 6.1). Even if the materials were thin and somewhat arbitrarily chosen, it remained a fact that, for the 1903–1914 period, the cyclical fluctuations of business (curve B) followed those of speculation (curve A), with an average lag of eight months. Money rates (curve C) followed both business, with an average lag of four months, and speculation, with a delay of one year.

Vienna’s Mises was critical of all such work. To him, Mitchell’s emphasis on the “purely empirical” examination of business cycles, unhindered by theoretical preconceptions, smacked of historicism. Mises argued that even if no satisfactory theory of the business cycle yet existed, it was not going to emerge inductively from the consideration of masses of statistical data. He saw Mitchell’s form of Institutionalism as an American reincarnation of the German historical method, and both as species of statist apologetics.

Then there was the aim of the Harvard group to improve the predictive capacities of statistical observation: the examination of trends in certain barometers was to help predict their future path, and Bullock’s group was already selling its services to private companies. To Mises, the idea that the future path of the economy could somehow be known, and approximated through statistical measurement, was anathema. What statistics could say about the economic order was very limited indeed, and was purely historical in that it referred to the past. The conceptual order of the economy could be grasped or understood when one reflected on the motivations governing individual economic action. This, in turn, involved the formation of beliefs and expectations, which were in perpetual flux. The economy, although it could be “understood”, could be only inadequately represented by statistics and could never be predicted. More dangerous, in Mises’ view, was the short step that lay between believing that one could capture the economy through statistical representation and advocating state intervention to correct anticipated downturns. He felt institutionalist modesty concerning the possibilities of theory had given way to illusions concerning the capacities of empiricism. All of this found an echo in the young Morgenstern’s response to the business cycle literature.

—Robert Leonard, Von Neumann, Morgenstern, and the Creation of Game Theory: From Chess to Social Science, 1900-1960, Historical Perspectives on Modern Economics (New York: Cambridge University Press, 2010), 99-100.