Milton Friedman’s contribution to economics is often misunderstood. He is most remembered for his public defense of capitalism, and for good reason. He had a wonderful way of explaining basic economics in a way the average person can understand. However, you didn’t win Nobel Prizes back then for simply explaining economics to the masses.
Friedman was among the first to bring serious quantitative analysis to the field of economics. Prior to Friedman, the field was largely an exercise in logic. He was one of the pioneers of the type of analysis that the world of sports calls analytics. He didn’t just make a logical argument for economic policy; he proved his theories with data. He also provided one of the greatest lessons for the use of data to prove or disprove theories: He said one must reject theories that cannot be backed up by facts. That part is easy. He also said you should reject facts that cannot be explained by theory.
In other words, it isn’t enough to just know the data, one must also know the why of the data. If one can’t figure out the why, then the data should be noted as a mere coincidence. So, what does this have to do with Alabama and Duke playing in the Elite 8 of the NCAA Tournament last weekend?
Analytics has become crucial to modern sports, and Nate Oats, head coach of Alabama’s men’s basketball team, is one of the most notable disciples. In basketball the numbers say that a team should take shots from the three-point range and from point blank range – three-pointers and layups. The shots in the middle, the mid-range shots, should be avoided. The reason is simple math: Layups are desirable because they can be made at a very high percentage.
Three-pointers are desirable because three is greater than two, the value of normal shots – actually 50 percent greater. The shots in the middle are not desirable because they are worth only two points and harder to make than layups. Many modern coaches have said no to mid-range shots, and Nate Oats is among the most outspoken on this subject. He will tell you it is just math, and facts don’t lie. So why did these mid-range shots used to be so prevalent in the game? Young coaches seem to believe it is because those who went before could not count to three.
Actually, it has to do with this thing called defense. The other team is allowed to try to stop you from scoring. They also teach math at Duke. Duke came in with a strategy: chase them off the three-point line and let their seven-foot two-inch center block the layups. Duke knew they didn’t have to guard the middle because the analytics department took care of that for them. It is a fact that three-pointers and layups are the best shots, but what is the theory behind eliminating one of the three ways to score from your offense?
When pressed on tariffs, the Trump administration often points to the late 19th century when the United States did not have an income tax and tariffs were a primary source of revenue for the federal government. This was a period of great economic expansion. That is a fact: We had high levels of tariffs and great economic success.
This was a period defined by the industrialization of the U.S., the rebuilding of the South, and great Westward expansion. In other words, this was a time when there would have been economic expansion regardless of domestic tax policy. What is the theory of how tariffs actually contributed to this success? There isn’t one.
We must reject theories that cannot be backed up by facts, but we must also reject facts that cannot be explained by any theory. The theory of good basketball offense is to take what the defense gives you and be able to score at all three levels. Duke is really good and they might have won anyway, but had Alabama attacked them in the midrange, they would have been closer and very likely opened up either the basket or the three-point line. Theory matters.
Tariffs were prevalent in the 19th century and we did okay; They were pushed hard in 1930 and brought on the Great Depression. Both of those are facts, but only one can be explained by any logical theory. Theory matters, at least that is my perspective.
Warm regards,
Chuck Osborne, CFA
