The Armchair Economist: Economics & Everyday Life

Product Information

Incentives matter. The literature of economics contains tens of thousands of empirical studies verifying this proposition, and not one that convincingly refutes it. Economists are forever testing the proposition (while perhaps secretly hoping to make names for themselves by being the first to overturn it) and forever expanding the domain of its applicability. Whereas we used to think only about shoppers responding to the price of meat, we now think about drivers responding to seat belts, murderers responding to the death penalty, and rats and pigeons responding to wage, income, and price changes. Economists have studied how people choose marriage partners, family sizes, and levels of religious activity and whether to engage in cannibalism. (This trend has gone so far that the Journal of Political Economy published a satirical article on the economics of toothbrushing, which "predicted" that people spend exactly half their waking hours brushing their teeth. "No sociological model," boasted the author, "can yield such a precise conclusion.") Through all the variations, one theme recurs: Incentives matter. The economist's faith in the power of incentives serves him well, and he trusts it as a guide in unfamiliar territory. In 1965, Ralph Nader published Unsafe at Any Speed, a book calling attention to various design elements that made cars more dangerous than necessary. The federal government soon responded with a wide range of automobile safety legislation, mandating the use of seat belts, padded dashboards, collapsible steering columns, dual braking systems, and penetration-resistant windshields. This means that raw accident statistics cannot reveal how drivers respond to Baby on Board signs. The problem is to find a clever statistical technique to make all the necessary corrections. I do not propose to solve that problem here, but I offer it as an example of a typical difficulty that arises in empirical economic research. Many research projects in economics revolve around creative solutions to just such difficulties. The principle I am applying is precisely the same one that predicted the disappearance of gasoline lines. When the price of gasoline is low, people choose to buy more gasoline. When the price of accidents (e.g., the probability of being killed or the expected medical bill) is low, people choose to have more accidents. Occasionally people are tempted to respond that nothing -- or at least none of the things I've listed -- is worth any risk of death. Economists find this objection particularly frustrating, because neither those who raise it nor anybody else actually believes it. All people risk death every day for relatively trivial rewards. Driving to the drugstore to buy a newspaper involves a clear risk that could be avoided by staying home, but people still drive to drugstores. We need not ask whether small pleasures are worth any risk; the answer is obviously yes. The right question is how much risk those small pleasures are worth. It is perfectly rational to say, "I am willing to search for a cassette while driving if it leads to a one-in-a-million chance of death, but not if it leads to a one-in-a-thousand chance of death." That is why more people search for cassettes at 25 miles per hour than at 70.

P.S. Since I joined GoodReads, I’ve tried to make a habit of reviewing everything I’ve read more or less right after I finished it, if only as a reminder to myself of what it was and what I thought of it. For the most part, it’s proven to be a pretty good discipline, and I’ve enjoyed it, and in the process, encountered some fascinating fellow readers in the world, so bonus points there, and now just you shut up about the narcissism of it all, if you please. Let me mention a third response as well. Ehrlich did not just make up the number 8; he arrived at it through a sophisticated analysis of data. Skepticism is fine, but it is incumbent on the serious skeptic to examine the research with an open mind and to pinpoint what step in the reasoning, if any, he finds suspicious.) There is evidence that people respond significantly to incentives even in situations where we do not usually imagine their behavior to be rational. Apparently psychologists have discovered by experiment that when you hand a person an unexpectedly hot cup of coffee, he typically drops the cup if he perceives it to be inexpensive but manages to hang on if he believes the cup is valuable. In the book Armchair Economist, Steven Landsburg argues that the reason behind cows' population growth is the ranchers' self interest. Due to the fact that ranchers' profits depend on breading more cows they will make sure that this specie will never go extinct. On the other hand existence of tigers will not benefit any body and that makes them prone to extinction. Following the same chain of reasoning Landsburg argues that recycling will have a counter effect on trees' population. By recycling the loggers' business will be less profitable which will decrease their interest in keeping forests full of trees and thus forests will be more in danger of deterioration. I’d recommend The Armchair Economist to anyone with an interest in economics, but I would caution: Landsburg is cranky, curmudgeonly, opinionated and rude. Delightfully so. I think he and I would get along very well, even if we don’t agree on everything, which we don’t. He knows far more about economics than I do, and I wouldn’t presume to suggest otherwise. But I know enough to recognize the difference between economic fact and economic opinion. He supplies boatloads of both, and presents them very well. If you’ve already gone through all the Freakanomics titles, and this has stimulated your own personal aggregate demand for more popular works of economics, I think you’ll find this entertaining and educational. Take it all with a grain of salt, though. And while you are at it, eat some more fiber.urn:lcp:armchaireconomis0000land:epub:b05f5d94-dee9-4e7b-93de-181ec438766b Foldoutcount 0 Grant_report Arcadia #4117 Identifier armchaireconomis0000land Identifier-ark ark:/13960/t89h46b9s Invoice 1853 Isbn 9781451651737 Now this is critical because this explains the real monetary value of walking along the beach. Non-economists might gag that this activity has a value, but it does. I could have done anything with my time, like work, but I chose to spend it in this particular manner, and that is worth something. So if enjoying nature means something, there could theoretically be a dollar value attached. In fact, there often is. My friend Judy owns a fat pad in Marin county (which she got for a song from a person shortly thereafter indited for international drug smuggling...but that story is for another time :-) Anyway, you would be hard pressed to find someone who loves nature more...for walking in it...swimming in it...and merely knowing it exists. But it does have a value. I don't know the number, but I would imagine that if a suitably ludicrous offer was made for 40 acres in Marin, that love of nature could be quantified. This insight, the fact that value must be attached, as hard as it may be, to non nuts-and-bolts numbers is true....and valuable...and then completely ignored as evident by the aforementioned millionaires example.

I wish I could say that this was a clever fiction I devised to make a point and a joke, but I’m nowhere near that clever.)People respond to incentives" sounds innocuous enough, and almost everyone will admit its validity as a general principle. What distinguishes the economist is his insistence on taking the principle seriously at all times. What is common in all of these rubrics? For one, they all invite healthy discussion and most importantly, if the proponent cannot prove it right, the dissenter cannot prove it wrong either so that makes all of these topics a moot point He implies that recycling will result in fewer trees being planted by paper companies. But he does not mention that recycling policies are usually accompanied by anti-deforestation policies and planting initiatives, which directly make his argument mute. I have to give this book a three since I did learn something, although I really hold it in remarkable contempt. For the first time ever while reading an economics book, I felt like I understood the contempt held for the 'dismal science'. I will provide you with some of the insights and questions that I faced while reading and I would be more than happy to have discussion on any of these:-