Theory vs. Reality

A Critical Examination of Financial and Economic Theories


Economic Theory Vs. Reality

by Jody S. Ginther

I doubt that anyone who has access to a TV or the internet would argue that our current economic theories are always true. So why do the economic "laws and theories" keep failing? I remember the first time I seriously doubted the connection between our current economic knowledge and reality. It was my first college economics course. The teacher stood up and said; "Now to make a economic calculation based on "x", we must assume that all other economic factors remain equal." I thought, "Huh? Has this actually ever happened in history? How has it been tested scientifically?" In reality, all other things never remain equal. This would mean our first assumption or the building block upon we build all the future concepts are built; is wrong! I realized that first week in class that popular economics is a set of various philosophies mixed with data, some research, and sprinkled with a little reality. In fact, for nearly every economic theory you will find equally convinced opponents who will argue beyond death about it being invalid. I can understand the intention to divide and conquer portions of a theory for the sake of a simplistic explanation is sometimes necessary. But, when does doing so make the entire concept or theories being developed invalid? Bad input=bad output.

So, where do we start? Unfortunately we still have to wade through the swamp and consider what the minds of many geniuses and incompetents alike have attempted to understand or explain about economics. But, we must remember that thinking totally as other people have been thinking, kills any possibility of innovation or discovery. We are then cursed to repeat the historical failures or temporary successes by walking on the same path they did. We must also keep in mind that the times are continually changing and what was valid yesterday may or may not be valid tomorrow. Einstein's theory was developed because he doubted and questioned what other scientists were teaching. He dared ask the question; "What if they are wrong?" We must do the same.

In future articles we will examine various economic and market theories with great skepticism and analysis. We must examine what people believe is true, test it as accurately as possible, and come to our own conclusions. The purpose of this article is not to discredit all of economic theory but to open your mind to think outside the box as we study it in future issues of Fortune and Fitness. As we now know, the world is not flat. If you are interested, I recommend a more in depth article on this topic by Nobel Prize Winner in Economics, and it's criticism by Friedrich August von Hayek.