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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.
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.