Ask What Changed: An Error in Cowen/Tabarrok Textbook
By David Henderson
A body at rest will remain at rest and a body in motion will remain in motion unless acted upon by an outside force.
— Sir Isaac Newton’s First Law of Motion
Have you ever had a conversation like this? You point out to a friend that the stock price of Hunky Chunky Potato Chip Company doubled in the last six months. Then your friend explains, “Yeah, that’s because people love potato chips. Their love borders on addiction.” Or you comment that far fewer people are attending Major League Baseball games this year, and your friend’s explanation is that baseball is so boring.
Your friend explained nothing. If people love potato chips so much, didn’t they love them last year too? Then why wasn’t Hunky Chunky Potato Chip’s stock just as high six months ago? If baseball is so boring, why were so many people attending last year? To explain a change in some variable, you have to point to something else that changed, not to something that stayed the same. What did change? Are people disgruntled over the baseball strike? Did ticket prices go up? Have people fallen in love with another sport? Something caused the change you’re observing. The trick is to identify the key elements that changed and not the fundamental elements that didn’t. We doubt that baseball has gotten less exciting or that people just recently discovered potato chips. It is entirely possible that the popularity of potato chips and baseball ebbs and flows, but then the variable that changed is the popularity itself.
These are the opening paragraphs of Chapter 4, “Ask What Changed,” in David R. Henderson and Charles L. Hooper, Making Great Decisions in Business and Life, Chicago Park Press, 2006.
I thought of it when I read the following in Tyler Cowen and Alex Tabarrok, Modern Principles: Macroeconomics, Worth Publishers, 2010:
Alternatively, many governments of sub-Saharan Africa have failed to secure the property rights of foreign investors. The demand to invest is correspondingly weak, shifting the demand curve for these countries’ currencies to the left and lowering the value of these currencies. P. 415)
Their error is in their second sentence. Can you spot it?