The Armchair Economist / Stephen E. Landsburg

This review appeared on my previous blog, Rat's Reading.

I wrote the following review more or less as I read the book, logging my thoughts on chapters that particularly got me thinking.

Well, I’m only two chapters into this book so far, and I’ve already got a beef with the author. Landsburg seems to me to be one of those economists who don’t live enough in the real world. His arguments sound much like the economist who won’t stoop to pick up a $100 bill on the ground because if the $100 were real, someone else would already have picked it up. He doesn’t say that specifically (at least so far) but his arguments sounds very much like one who would.

Cover of The Armchair Economist

For example, he uses an example of a city building an aquarium for its residents edification. However, as soon as it opens people line up and the line is perpetually 45 minutes long. No one is willing to wait longer. As such, the money spent is of no benefit to the people in the town at least compared to their other options. The indifference principle says that if people aren’t willing to wait longer, they’ll return the the park or some other option they had before the city built the aquarium. Any time the line gets less than 45 minutes long, someone else enters the line bringing it back up to 45 minutes. Hence, no one ever benefits from the new aquarium.

The fallacy of the argument is that it completely dismisses the people who happen upon the aquarium at the moment the line drops below a 45 minute wait. And the people who continue to make use of previous options like the park no longer face places that are as crowded. The people are definitely better off. Whether it’s worth the money spent to build the aquarium or not is a whole nother question. But the benefits in this case do not flow just to the people who own fixed resources.

I’m sure his counter-argument would be that now that the city is somewhat better off, more people will move there to take advantage of the city’s amenities. Enough people will move that costs to current residents will go up and they will no longer be better off. Everything must remain indifferent. This counter-argument ignores the transaction cost of moving to the city, the extra benefit of the amenities that is used by the cities residents until the new people arrive, and the transfer of wealth from the people who move in to the people who already live there (landlords and other producers of products). In other words, there exists absolutely no real world case that even comes close to approximating the ivory tower proposition of Landsburg’s Indifference Principle.

For another critique of the Indifference Principle, read The Case of Landsburg.

Now, upon reading chapter three, Landsburg has redeemed himself somewhat. Here’s the pithy quote that is awesome:

By the standards of economics, a policy that does nothing but encourage people to work harder and die wealthy is a bad policy.

And yet again when I read Choosing Sides in the Drug War, Landsburg’s explanation of cost-benefit analysis, I start to shake my head at his theoretical bent. First he chides Richard J. Dennis, the author of an op-ed piece advocating drug legalization, for conducting a bad cost-benefit analysis in that op-ed. Except that Dennis hasn’t necessarily conducted a bad cost-benefit analysis. Dennis just wasn’t using the term as Landsburg (and presumably other economists would). I wonder if Landsburg was successful in getting people to accurately recognize when the millennium ended.

Landsburg explains how an economist would conduct a cost-benefit analysis. It’s based on the following two principles:

  1. Only individuals matter, and
  2. All individuals matter equally

While I can agree with the former, the latter is very much an ivory tower principle. In his world, if a thief takes a $50 dollar radio, it doesn’t matter. Someone is getting the use out of the radio. His objection in economic terms is that the former owners of the radio then take wasteful measures to protect their property, which could be better spent elsewhere. Never mind that they now have to spend $50 to purchase a replacement radio. There’s a bit of purity in the academic article, but his argument falls flat.

In addition, he advocates here that distinguishing which individual should get the benefit of some policy, we should evaluate based on an individual’s willingness to pay. Well, Landsburg has been pushing that idea for a few chapters now, but it’s at this point that I realized what about that really irritated me. Perhaps he’ll address it later, though I bet it’s addressed in isolation, not with regard to these arguments he’s making. It’s the free rider problem. If we have business that’s polluting the environment, Landsburg’s proposition is that whether or not the business can get to pollute should be calculated by asking everyone who wants the plant to produce and pollute ponies up some money (presumably based on how much the business’ product is worth it to them individually, that’s the rationality assumption inherent in economics). Then everyone who wants clean air gets to pony up some money for stopping the pollution (presumably based on how much breathing clean air is worth it to them in better health costs and pleasant breathing). Whoever has the most money wins. But this is bad for the following reason, the people willing to pony up the money in favor of no pollution are shouldering a cost for a benefit that everyone gets to use. Free riders may not be willing to pay, but they are sure willing to use the benefit. And then there’s the rationality assumption. Others may not be willing to pay simply because they do not recognize the benefit they’d receive. Economics usually assumes that individuals know what’s best for them. But that’s a false assumption. Rationality is a generally good assumption, but there are plenty of cases where this assumption fails. People tend to overvalue current events compared to future events. People often don’t have the information needed to evaluate things well, and so they aren’t willing to pay simply because they can’t see the benefit. There’s all sorts of holes in this assumption.

In his analysis of Dennis’ analysis, Landsburg criticizes the idea that taxing drugs is a net public good. This is a failure of the second principle. Landsburg would have you believe it doesn’t matter if it’s the drug user who gets the money or the government (as a proxy for other individuals). But I’d much rather see my taxes cut overall because we’ve added previously untaxed portion of the economy to the mix. Now, if I were a drug user, it’d be likely I’d see no cut in taxes, or perhaps an increase. However, is it really good policy to exempt that portion of the economy from the benefits and responsibilities of government intervention (e.g., property rights).

In the end of the chapter, it becomes clear that Landsburg doesn’t really advocate a strict cost-benefit analysis for evaluating policy. So his real objection in the end is that Dennis uses the term differently than Landsburg would. Whatever.

Landsburg has an interesting proposition in Courtship and Collusion. The theory is that much of courtship is an elaborate economic game played by men and women. Unfortunately, it’s argument by analogy. He notices some similarities between the banning of breast implants and government enforced monopolies, and concludes that monopolistic behavior is what drives a ban on implants. Here’s the argument: breast implants will make a woman more attractive to men generally. Except that not everyone can afford implants. By afford, they may not have the money, or they may not afford the possible health problems, or they just may not be able to afford the lessening of their peace of mind. Colluding together to ban the implants means they compete on other grounds. If it weren’t government enforced, there’s incentive for some women to cheat. Women who can afford it. Now, enforcement by the government saves some women the cost of competing on breast implants, but it also costs them the opportunity to be more attractive. But, by and large, it makes attraction less costly to many, since breast implants don’t always make a woman more attractive. Yup, it makes certain sense, but I don’t know if I buy the argument. I don’t know the hole, if there is one, though.

Landsburg ends the book with a criticism of environmentalism. Specifically he calls it a religion that imposes right and wrong with no economic rationale. Perhaps we’re willing to have fewer species in return for having more consumer goods. In the economic world, there is no preference for one over the other except what people are willing to pay for. I think his criticism and analysis fails for the same reason I noted above: the free rider problem. Perhaps if there were a market for biodiversity or air or any other number of environmental problems, there might be something to his argument. But until there is, the production of goods has costs that are not captured in their prices. Those uncaptured costs are borne by everyone. If there were an option to emigrate to Mars or other planets, there’s no way to recapture them. Unfortunately, the environmental movement is hampered by the fact that it does not know the costs. So it loses the argument because without being able to demonstrate the costs, the economist side of things argues that those costs don’t exist. Again, unfortunately, it can be very costly to determine what those costs are, and the economist side doesn’t want to spend the money to determine them because it’s religion says those costs don’t exist, and the environmental side doesn’t have the dough to do so, for a number of reasons. In the end, Landsburg may be correct. But he’s got the religion just as much as the environmentalists he derides for their religion.

I’d love to see the economist solution to global warming.

And yeah, I know I’m revealing a lot of my ignorance of economics with some of these criticisms.

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