Book Review: Discover Your Inner Economist

Tyler Cowen's contribution to the recent spate of pop economics books that started with Steven Levitt's Freakonomics is these best of the bunch. The dangling carrot on the dustjacket symbolizes Cowen's view of economics: incentives matter. While other of these books pose interesting conundrums to the layman and professional economist alike and do much to put a sexier shine on the field than many practitioners are able to do (remember the worst economics class you ever took, including graduate school), none is able to constructively challenge doctrinaire economic thinking and connect with the intuition that all people have--their "inner economist."

For example, getting the dishes washed is not a problem best solved by paying one's kids or significant other. Instead, it is probably best tackled by giving the victim/washer incentives other than monetary. Cowen recognizes that homo economicus maximizes in multiple dimensions simultaneously--we respond to both strong and weak incentives, some of which affect our earnings, but many others that don't. Art, literature, culture, vanity, and most importantly, control are central topics in the book. There are a lot of ways to control your life without paying everyone to do what you want--in fact, that strategy is unlikely to yield the results you desire. The notion of a person who only cares about one thing, money (or a person all of whose cares can be translated into money), is rejected by Cowen. He appeals to the humanity of his reader, who knows this intuitively, but who may still want to figure out how to get a waitress to optimize a dining experience in a restaurant or reward his dentist for her great service. It is no surprise that Cowen's insights on gustatory pursuits are excellent. He even gives some tips on home cooking.

Like other books in the genre, Cowen's offers wonderful antecdotes for the prospective economics teacher. His treatment of complex issues is thorough but understandable. While the conclusion is weak by comparison, the perspective of a very capable practitioner outside the mainstream of economics lends a stimulating perspective on choice and scarcity to all readers.

Beer in the fridge, eh?

Denise Young's Energy Policy piece about the social costs of second refrigerators in Canada has spurred plenty of public interest by varied outlets, ranging from the CBC to Bob and Doug MacKenzie. She has three points:

1. Some Canadians choose to keep old refrigerators when they buy a new one
2. Old refrigerators tend to be less energy-efficient than new ones, sometimes dramatically
3. Policies that target energy-efficient appliance use have room for improvement.

The comical pejorative usage of the term "beer fridge" in quotes throughout the article aside, these are valid and interesting points. Durable goods purchases are sticky in the sense that people hang on to them, and refrigerators appear to be stickier than some other appliance purchases. So older appliance vintages likely persist longer for refrigerators than we might otherwise expect.

Canadians demand refrigeration (or perhaps warmth in much of the Great White North) for any number of reasons. Perhaps they need to store game meat, or increase capacity to capitalize on buying in bulk at warehouse stores, or to reduce resupply trip costs. Demeaning the demand for refrigeration doesn't seem like a valid strategy--if refrigerators are of a size that is inadequate for all refrigeration demands (perhaps because larger fridges increase transport costs prohibitively), why shouldn't someone have more than one? Perhaps the cost of refrigerators is such that most people are unable or unwilling to buy them two at a time. The paper dismisses the demand for refrigeration by assumption. The paper adopts a viewpoint of substantial cold beer reserves as a superfluous luxury indulged in by people callous to the impacts of their actions. My guess is that price elasticity estimates of beer demand are fairly low (but perhaps sensitive to income). While the paper does a fine job of estimating the total costs of additional use of older, inefficient refrigerators, it does not speak at all on the demand, and therefore the pertinent societal tradeoff. Perhaps we should engage in a study of the external costs associated with second televisions. Obviously anyone who keeps the old set in the shop to tune into the hockey game is an irresponsible Canadian (but perhaps not if they watch David Suzuki).

The paper is interesting and a little cute. But it misses the point that optimal tradeoffs depend on both costs and benefits, and deriding benefits a priori isn't productive.

Cognitive Connection

http://www.businessgreen.com/business-green/news/2211278/report-urges-government

Game Theory as Tool

This story reminds me of a tenet of practical game theory: your best response should take into account the mistakes you believe your opponent will make. Fixed-points likely played no role in the analysis that lead Britain to employ an astrologer during the war, but this is an example of game theory, to be sure. Since Hitler consulted an astrologer, so did Britain, to discover what Hitler was likely to do. I love it.


http://www.news.com.au/story/0,23599,23317116-38200,00.html