The Armchair Economist: Economics & Everyday Life

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Another problem that Landsburg covers is price discrimination, which he finds an inherent part of the market. The author provides several examples in which price discrimination can and cannot work, showing that its success depends on the target customer group and the industry’s conditions. For instance, a difference between a barber and a baker offering senior discounts is the person that is able to use the service immediately (Landsburg, p. 42). A person cannot get a haircut at a lower price if they are a senior, while someone could ask their grandmother to buy them bread. Thus, this tactic works in particular markets, and managers should always consider the demographic they aim to attract (Chevalier and Kashyap, p. 128). If you find it hard to believe that people drive less carefully when their cars are safer, consider the proposition that people drive more carefully when their cars are more dangerous. This is, of course, just another way of saying the same thing, but somehow people find it easier to believe. If the seat belts were removed from your car, wouldn't you be more cautious in driving? Carrying this observation to the extreme, Armen Alchian of the University of California at Los Angeles has suggested a way to bring about a major reduction in the accident rate: Require every car to have a spear mounted on the steering wheel, pointing directly at the driver's heart. Alchian confidently predicts that we would see a lot less tailgating. In 1983, Prof. Edward Learner of the University of California at Los Angeles published an amusing article called "Let's Take the Con Out of Econometrics," in which he warned that the prejudices of the researcher can substantially affect his results. Leamer used the death penalty as an example. He showed that a simple econometric test, with a prodeath penalty bias built in, could demonstrate that each execution prevents as many as 13 murders. The same test, with an antideath penalty bias built in, could demonstrate that each execution actually causes as many as 3 additional murders. Still, unless one goes very far in the direction of building in a bias against the death penalty, most econometric research reveals a substantial deterrent effect of capital punishment. Murderers respond to incentives. Peltzman's observations reveal that driving behavior is remarkably sensitive to changes in the driver's environment. This affords an opportunity for some drivers to influence the behavior of others. Those ubiquitous Baby on Board signs provide an example. The signs are intended to signal other drivers that they should use extraordinary care. I know drivers who find these signs insulting because of the implication that they do not already drive as carefully as possible. Economists will be quite unsympathetic to this feeling, because they know that nobody ever drives as carefully as possible (do you have new brakes installed before each trip to the grocery store?) and because they know that most drivers' watchfulness does vary markedly with their surroundings. Virtually all drivers would be quite unhappy to injure the occupants of another car; many drivers would be especially unhappy if that other car contained a baby. That group will choose to drive more carefully when alerted to a baby's presence and will be glad to have that presence called to theft attention. 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.

After this slight digression into the challenges of empirical research, let me return to my main topic: the power of incentives. It is the economist's second nature to account for that power. Will the invention of a better birth control technique reduce the number of unwanted pregnancies? Not necessarily — the invention reduces the "price" of sexual intercourse (unwanted pregnancies being a component of that price) and thereby induces people to engage in more of it. The percentage of sexual encounters that lead to pregnancy goes down, the number of sexual encounters goes up, and the number of unwanted pregnancies can go either down or up. Will energy-efficient cars reduce our consumption of gasoline? Not necessarily — an energy-efficient car reduces the price of driving, and people will choose to drive more. Low-tar cigarettes could lead to a higher incidence of lung cancer. Low-calorie synthetic fats could increase the average weight of Americans. 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 this revised and updated edition of Steven Landsburg’s hugely popular book, he applies economic theory to today’s most pressing concerns, answering a diverse range of daring questions, such as:

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Quality of life means more than just consumption”: Two MIT economists urge that a smarter, more politically aware economics be brought to bear on social issues. I remember the late 1970s and waiting half an hour to buy a tank of gasoline at a federally controlled price. Virtually all economists agreed that if the price were allowed to rise freely, people would buy less gasoline. Many noneconomists believed otherwise. The economists were fight: When price controls were lifted, the lines disappeared.

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. Landsburg received a Master of Arts degree from the University of Rochester in 1974, along with a Doctor of Philosophy degree from the University of Chicago. [2] The now Rochester Professor of Economics released his first book, Price Theory and Applications in 1989 and followed it up in 1993 with the first edition of The Armchair Economist. [3] Since then he has written for many different publications such as Slate, The Wall Street Journal as well as releasing numerous other books surrounding the topic of Economics. [3] [4]

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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. Below is an excerpt from the “ Iowa Car Crop” chapter in Steven E. Landsburg’s book The Armchair Economist– it’s based on a story Professor Landsburg learned from David Friedman. The story of the “Iowa car crop” manages to explain everything we need to know about international trade theory based on the insight that we can actually “grow cars in Iowa.” It’s an amazingly simple story and yet brilliant at the same time –“economics at its best” as Professor Landsburg reminds us. A psychologist and Nobel Prize winner summarizes and synthesizes the recent decades of research on intuition and systematic thinking.

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:- 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. This means that if you chose this book randomly off the shelf, it would be as likely to exceed your expectations as to fall short of them. But you didn’t choose it randomly off the shelf. Rational consumer that you are, you chose it because it was one of the few available books that you expected to be among the very best. Unfortunately that makes it one of the few available books whose quality you are most likely to have overestimated. Under the circumstances, to read it is to court disappointment." I don't usually review books for the benefit of others. If I do, I usually make a brief statement for me to remember what I felt at a later time. But for those who want to read this book, which has been touted as the predecessor of "Freakonomics", or as a layman's introduction to economics, I have to say that it has been the worst book I've read in a long time.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. The Indifference Principle-->"Unless you are unusual in some or the other way, nothing can make you happier than the next best alternative" Lets unravel this. If there are 2 options in the world to choose from, for instance, whether to go to a fair or to go to a park then the only way you will feel special about your choice of going to either of the places depends of the fact that it has to be relatively unique. This means that suppose you choose to go to the fair, then going there holds that special value to because not everyone else chose that option. Isn't this equivalent to enslaving our satisfaction at the hand of others? He deliberately avoids discussing the weight of human life, health or rights and their place in economics. Why a society demands the safety of people in hazardous situations is not completely attached to an economic cost is something he avoids commenting on. This book enforces the view that economists see everything in material cost (dollars, resources, production) without appropriately giving any importance to the unseen costs (happiness, quality of life, satisfaction) of economic policies.