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Monday, March 13, 2017

Everyone Is a Theorist

Some theories, though, are better than others.

A common complaint against economists is that we’re “ivory-tower theorists.” The accusation is that theories are not reality and, therefore, anything an economic theory says about reality is worthless.

Everyone uses theories to explain reality.

Heaven knows some economists are guilty of peddling worthless, even destructive, theories. Yet this fact doesn’t mean all economic theories are worthless or destructive. 

A theory — any theory, whether it be about economics, biology or astrophysics — is nothing more than a story told to make better sense of reality. Sometimes the story is told using lots of mathematics, or plenty of graphs, or just words. Sometimes a theory is a long and intricate work of genius; other times it’s a short spurt of common sense. Any theory’s form, source, and formality are less important than its effect. If the theory causes you to say, “Aha! Now I better understand reality!,” the theory is useful. 

And everyone theorizes. 

For example, the non-economist observes that propane and plywood prices skyrocket immediately after a natural disaster. He naturally asks why. His typical answer is “greed.” That is, the story the non-economist tells to explain the observed rise in prices is that merchants have become greedy. 

“Greed” here is a theory. But it’s a poor theory — by which I mean that there’s a different story to tell about the rising prices that most people find more compelling. 

The economic theorist (storyteller) starts by asking if natural disasters cause greed to rise. If the “greed” theory is correct, greed must be caused by natural disasters; otherwise, merchants would raise prices dramatically even in the absence of natural disasters. Clearly, something other than “greed” must explain the price hikes. 

Economists’ theories generally explain reality better because economists are trained to ask questions that non-economists often don’t ask.

A natural disaster simultaneously makes people more eager to buy goods such as propane and plywood while it increases the difficulty of supplying people with these goods. The approach of a hurricane, for instance, causes homeowners to buy plywood to cover their windows and, after the hurricane passes, to buy more plywood to patch damaged roofs and rebuild destroyed homes. At the same time, the hurricane ruins much of the plywood in inventory at stores and warehouses and makes many roads and bridges impassable, thus slowing the arrival by train and truck of new supplies of plywood. Plywood, now being much more scarce in the hurricane-ravaged area, fetches a much higher price. 

And what’s true for plywood is also true for propane, bottled water and many other goods and services. 

Telling of this increased demand for goods along with the simultaneously decreased supply of goods is a far more compelling explanation — a better theory — than is “greed” for the sudden post-natural-disaster jump in the prices of goods. 

So it isn’t the case that economists use theories to explain reality while non-economists don’t. Rather, everyone uses theories to explain reality. Some theories, though, are better than others.

Economists’ theories generally explain economic reality better than non-economists’ theories only because economists are trained to ask questions that non-economists often don’t ask, such as: “Who will pay for that?” “If tariffs cause Americans to produce more steel, where will the resources to produce this extra steel come from?” And that most important of all questions that good economists ask: “As compared to what?”

Reprinted from Trib Live.

  • Donald J. Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, and a professor of economics and former economics-department chair at George Mason University.