The Problem of Accuracy of Economic Data

Abstract

In his classic book On the Accuracy of Economic Observation Oskar Morgenstern deals with a common, yet widely neglected problem with which economic historians are faced, namely the quality of economic data. For the economic historian in the Austrian tradition, the quality of economic data is of utmost importance, since false data or belief in inaccurate data can lead the economic historian to faulty interpretations of the past.

The quality of economic data is at least as important for economists who adhere to positivism in economics, since they use economic data to confirm or falsify their models.

Likewise, Morgenstern’s insights are relevant for mathe-matical economists, as it makes sense to perform computations and solve a system of mathematical equations only if one has reliable data.

Morgenstern’s sample equations show the significance of a small error in the observation. Yet, in more complex equations with extensive mathematical operations the extent of error due to unreliable data may increase (or, depending on the equation, the errors may cancel out). It is indeed surprising to note how much the problem of accuracy in economic data has been neglected.

This is not so in the physical sciences. There the error of observation is always explicitly mentioned. Yet in economics there is simply no error estimate. This means that we do not know the accuracy of the economic data presented to us. This is even more troubling when we consider that in social or economic data there are more possible sources of error than in the physical sciences. We therefore face the question of why the problem of accuracy of economic data is rarely mentioned or passed over in silence in economics, while in the physical sciences this problem is widely acknowledged.